Finding the right fund – Part I

Steve Merrell |

With a universe of 8,000 mutual funds and more than 2,000 exchange-traded funds, finding the right fund for your portfolio can feel as daunting as looking for a needle in a haystack. If this has been a challenge for you, the following tips will help you find a fund to fit your portfolio.  

Investing is an information game, so as you look for a fund you need to develop good sources of information. Fortunately, the internet is a goldmine of data and much of it is free.  One of the best sites for free financial data is Yahoo Finance ( The website isn’t pretty, and you have to wade through some of the dumbest ads on the internet, but enter the ticker symbol of a company or a fund and suddenly you find yourself in a wonderland of data. It is a treasure trove for numbers junkies like me.

Morningstar ( offers one of the best sites for mutual fund research. In fact, a number of other investment websites rely on Morningstar data (including Yahoo), so it makes sense to use Morningstar as one of your primary sources. Morningstar offers a premium membership for $199/year that offers fund screening and portfolio tracking tools, but most people will find the free service to be perfectly adequate.

When you research a fund, your primary goal should be to understand the skill of the portfolio manager. To do this, you have to look beyond the fund’s performance. A fund can have strong historical performance and still be poorly managed. Sometimes managers are just lucky. You don’t want to invest in a poorly managed hot performer just in time for the manager’s luck to change.

I saw this first-hand in the 2008 financial crisis. In the years leading up to the crisis, a bond fund managed by Western Asset Management (WAMCO) was one of the best-performing bond funds in the country. Because of its strong performance, its portfolio managers were viewed as some of the brightest in the industry. Then the crisis hit and investors quickly discovered that it wasn’t the staid bond fund everybody thought it was. While the rest of the investment grade bond universe held steady, WAMCO’s performance plummeted. By year-end, the investment grade bond index was up 5.24 percent, but the WAMCO fund was down more than 10 percent. It soon came to light that the fund’s earlier strong performance was the result of high-risk positions they had not fully disclosed. The managers weren’t as smart as they were lucky.

You can learn a lot about how a fund is managed by reading its regulatory filings. Among other things, mutual funds are required to file three documents each year with the SEC: the fund prospectus, the summary prospectus, and the statement of additional information (SAI). I find the SAI to be especially helpful as it often reveals more detailed information about how the fund is managed than you will find in the other documents. SEC filings are not for the faint of heart. They are usually full of jargon and legalese. However, if you have the patience to wade through them, they will reward you with a deeper understanding of the fund. You can find these statements at the SEC website (, but it is usually easier to look for them on the mutual fund company’s website.

Mutual fund companies sometimes post other information on their websites, including fact sheets and podcasts and video presentations from portfolio managers and analysts. These podcasts can give you a good sense of how the portfolio managers think and how they are managing the fund. Dodge & Cox ( is an excellent example of a fund company using their website to keep their investors in the loop.

You can also dig through a fund’s actual holdings to get a sense of how it is being managed. Funds are required to post a complete list of their holdings each quarter no later than 60 days after their quarter ends, but most publish them within 30 days. Again, these are often available on the fund company’s website. Pro tip: If you read through the list of holdings and find a bunch of stuff that you can’t understand, it is probably not the fund for you.



Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to