Fund criteria checklist
Kicking the tyres of a mutual fund
It’s time to review a mutual fund fact sheet, prospectus and financial statements for the oldest operating mutual fund in the United States (since 1924), the Massachusetts Investor Trust (MFS) with current assets under management in excess of $5.8 billion.
Last week we provided a blank Mutual fund Criteria Checklist as a download PDF, link here, along with some of the major criteria used to review a fund (http://www.royalgazette.com/martha-myron/article/20191026/running-rule-over-mutual-funds).
This week, we fill in numbers for MFS — symbol MITTX — to demonstrate how you can track mutual funds you own or may wish to purchase. Our local investment firms’ fact sheets will be very similar, as the global securities industry embraces uniformity in reporting.
Caveat: this is a general overview only as last week. Numbers are subject to change without notice. We focus on some relevant facts as detailing every mutual fund facet could easily surpass book size, plus you could be lost in the boredom.
If you are interested in understanding how mutual funds work and whether they will meet your personal comfort investment factor, read on.
The Unique International Security Identification Number is critically important. Just about every public security (or privately) traded must have a unique ISIN. An ISIN is not the same as a ticker symbol as securities including funds, have more than one class, are registered in more than one country and trade on many exchanges. All Bermudian public companies have ISIN numbers listed.
Fund Composition / Objective and Style
The fund is actively managed utilising the strategies and skills of experienced portfolio managers, primarily investing in 98 per cent of US stocks of large capitalised companies.
Two distinct mutual fund styles: actively managed funds (by investment professionals) charge fees to outperform their particular benchmark index, provide downside risk mitigation, can be specific an investor’s profile (think Life Funds with different age horizons).
Passive funds duplicate and track an index (say the S&P 500, or a bond index) in similar proportions. No management means lower fees, no risk mitigation or downside protection.
The “one-hit wonder”, prevalent during the heady tech boom days of the late 1999’s-2000, for instance, were exactly that — one terrific year and six years of losses. So many were hurt financially when those “wonders” crashed that a website, now defunct, called Deathwatch tracked these tech companies’ demise. Good mutual funds should display consistency and decent performance over time.
I like to see at least five years of performance in average annual total returns, preferably more than ten years. The $10,000 chart invested in 1996 shows a tripling of return to more than $30,000, though several market crashes and a large recession intervened. See Yahoo Finance https://finance.yahoo.com/quote/MITTX/risk?p=MITTX
Performance is assessed in several ways:
• Against like-type peer groups
• Against a benchmark index, MITTX is compared against the S&P 500 index
• Against the amount of risk taken to achieve a return, this is mathematical measurement
• Against the fee cost: US funds report performance, net of fees, however UK and other countries may report returns, gross of fees, leaving the investor to figure all fees and subtract from the gross number to arrive at the real total rate of return
Benchmark Index — S&P 500 Comparison
The S&P 500 is widely regarded as the best single gauge of large-capitalised US equities of the 500 leading US companies. Large cap firms’ market valuations range from $10 billion upwards to multinational firms of $500 billion plus. MITTX held its own, outperforming its benchmark S&P 500 for most of the last ten years; long-term historically, 68 years upside, 26 years downside since 1924.
MITTX as stated is a mutual fund, almost 100 per cent composed of 75 large cap common stocks including Google, JP Morgan, Visa, Mastercard, Johnson&Johnson, etc, in the top ten holdings.
Compared to what capital markets considers the risk-free range, generally, the three-month Treasury bill, around 1.6 per cent; a term deposit is also considered risk-free — you know what the outcome will be. Thus, anything above these numbers has risk to be quantified.
Markers of 0.95 — is the measure of volatility of the fund compared to the overall market. The capital market has a beta of 1; MITTX is considered less risk than the market.
Avoiding the statistics for now, measures volatility differences between the average and the outliers in a set of data. MITTX is compared to its benchmark index S&P 500 and for this timed report, has less volatility than the average.
Based on the prospectus disclosures, no leverage appears to be used to enhance returns on investment. Be very, very careful of this strategy in any security. Leverage can make you happy with great appreciation, but conversely, losses can be devastating.
Take a look at the MITTX fund compared to the S&P 500 and the average of other funds in the category. You, too, can compare your mutual funds using this example, by downloading the blank Mutual Fund criteria checklist from last week’s Moneywise column, October 26, 2019.
Running the rule over mutual funds
Keep in mind that local mutual fund fact sheets are presented in similar fashion to the MITTX fact sheet. You can also use the checklist as an opportunity for discussion with your adviser.
So what should you be looking for in a mutual fund?
Beginning in December, we will explore various mutual choices, how to research the offerings independently, whether they will fit your personal mandate, and enhance your pension choices. We will discuss how they might provide complementary investment policy, or take an adverse role in your overall financial position.
And, we will discuss signs and research to help you to avoid buying a scam or non-existent “phoney” fund, a pyramid scheme and outright fraud.
Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Contact: firstname.lastname@example.org
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