The 3 C's for Evaluating a Mutual Fund

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Information about The 3 C's for Evaluating a Mutual Fund
Education

Published on January 9, 2014

Author: cameronpwilson26

Source: slideshare.net

Description

The 3 C's for evaluating a mutual fund are Composition, Consistency, and Cost. This was a handout I designed for a lecture I gave at Linfield College about using Morningstar and evaluating mutual funds. The definitions for each, along with example are provided

“The Three C’s” Definitions of the Three C’s Composition: Composition is comprised of what can be found in the mutual fund i.e. the stocks that are in the fund. You can find the stocks that are currently in the fund in the holdings category in the “portfolio” section of the Morningstar page. This can also be classified as the type of stocks that are in the portfolio such as defensive, cyclical, or sensitive stocks. These terms are the overarching categories into which the stocks fall depending on how Morningstar classifies them. Another major component of composition of a fund is the asset allocation that the fund chooses. Asset allocation can be defined as the how the fund chooses to apply its total assets, whether it is holding it in bonds, stocks, cash, etc. An overall definition of composition is simply, “What is in the fund”. Consistency: Consistency has many different facets to it. Consistency encompasses multiple things, such as rolling performance, manager changes, style changes, risk metrics, and turnover rates. It is an overall assessment of what the fund has been doing over the years. Performance is a solid measure of consistency because it shows how the fund has been doing in relation to both the market and its benchmark (REMEMBER, IT DOESN”T MEAN ANYTHING IF YOU AREN”T COMPARING YOUR RETURNS TO SOMETHING ELSE!). Manager and style changes are important in consistency because it can have a dramatic effect on the overall consistency of the portfolio. Manager changes can spook investors if they are unfamiliar with the new manager and may cause them to panic and pull their money. Turnover comes into play here as well; if a manager is constantly moving stocks in and out of the fund, it may be inconsistent in returns (not always the case). In terms of HSCSX, their managers have been with the fund since inception, so they all understand the strategy (BOOM….CONSISTENCY). The same goes for style. Changing of style can affect the consistency of the risk metrics; if the fund goes from value to growth, the risk will change due to the inherent risk of growth stocks. An overall definition of consistency is simply, “What and how is the fund doing?” Cost: Cost can be defined as just the overall cost of the fund: Minimum investment, cost structure, additional fees. The additional fees can include redemption fees, deferred fees, and 12b-1 fees. Another factor that gets included in cost is whether or not there is a load on the fund or not. A load is a commission that has to be paid that compensates the intermediary for their time and expertise in selecting the fund. The overall definition of cost is simply, “How much does it cost to get in and stay in?”

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