Three weeks ago, we started the process of learning how to review the mutual funds in your personal (and pension portfolio).

In the first article, you were given a personal risk tolerance test to take on your own time. In the second article, we determined the asset allocation appropriate for your risk profile, and selected a fund to review.

If you would like either of these articles in this series, you may obtain it by downloading them from www.theroyalgazette.com website, or calling The Royal Gazette and asking for a copy.

Note that I will give you website addresses for all criteria we will discuss. Do some exploring, challenge yourself, and go to these websites, upgrade your investor education. Website addresses we will be working with are:

For US mutual funds, go to: http://biz.yahoo.com/p/fam/sequoia_fund.html

For offshore mutual funds, go to: http://www.funds-sp.com/servlets/managers.Managers

Continuing with the featured fund of last week, Sequoia (SEQUX) let us start with the obvious.

What is it, how is it performing, why do I want it? I refer you back to your investor profile asset makeup, 55% equities, 35% bonds, 10% cash. Of the 55% equity component, we will apportion the funds out this way - 30% large cap value, 30% large cap growth, 20% small cap value, 20% small cap growth. Therefore, in math terms, of your equity make up, 60% is large cap stock mutual funds and 40% small cap mutual funds. Keep these allocations in mind, they become very important when various asset groups under or over perform the market.

When we discuss stocks or bonds in the broader sense for this article, we mean a selection of stocks or bonds contained within a mutual fund. Further breaking down the equity component, a well diversified portfolio will have the allocations above, and may even contain what are known as mid-cap stocks, a couple of bond funds, and even a small percentage in alternative classes or hedging type funds.

The general rule for the more conservative investor is, the higher the risk (of loss or large gains), the less of that element is contained in the total allocation.

These comments are echoed so often in the industry, but they are so very true.

When a publicly trade company is labelled, large, mid or small market cap, what does that mean and how do we know if that is what we are actually purchasing?

Three ways:

a) Let's take Berkshire Hathaway - stock symbol BRK ; go to the financial reports of a publicly traded company, it is all there on the company website www.berkshirehathaway.com or, you can go to the United States Securities and Exchange free website, www.edgar.com.

On its balance sheet under shareholder's equity, the line will actually state the number of shares outstanding. This number of shares, which can be huge, is multiplied by the market value per share as of the date of the report.

Berkshire Hathaway (www.berkshirehathway.com), which represents 35% of the holdings of the Sequoia Fund, for instance, has a market cap in billions.

A stock mutual fund may contain shares of anywhere from forty to hundreds of large capitalized companies.

b) Industry categorisation, generally, large cap stocks have market capitalizations above 3 billion, mid-cap 1-3 billion and small cap up to 999 million.

Market capitalisation can be of fleeting flame; consider World.com, once a large cap company, now with its shares valued in cents - not dollars. It is a shadow of the giant it once was.

c) Each mutual fund has an Investment Policy Statement (contained in the prospectus), which will actually spell out the criteria under which the mutual fund managers will operate. Readers, this is supposed to be the fund manager's bible, but do they always adhere to the policy?

The Sequoia policy statement reads as follows:

Sequoia Fund seeks growth of capital and invests primarily in common stocks and convertible securities of companies that management believes are undervalued. No weight is given to technical stock-market studies, nor are such techniques as borrowing, hedging, or short sales used.

Extensive study is made of balance sheets and earning-power factors to appraise the fundamental worth of investments. The fund may also invest to a limited extent in restricted securities and special situations, and may invest up to 15% of assets in foreign securities. The fund is non-diversified.

There, pretty complex statement, but by virtue of this description, we know that the first fund we are tracking is a large cap value fund.

Surprise, the fund profile also tells us so. This is the fund manager's mandate; this is how the fund holdings will be handled. This adherence to this investment style is important to the overall composition of your portfolio, as we shall see further along in this sequence.

What prevents the fund from changing direction and chasing the pack when small cap growth funds for instance are returning fabulous profits? Nothing, really, except the wrath of investment advisors everywhere - and US Securities and Exchange regulations - who built portfolios around state certain investment objectives - for each fund.

How does our first fund stack up? This fund has consistently over twenty years performed in the top 25% of its class. Next Lesson, we discuss the holdings, risk factors, convertibles, management style, and move on to the researching the next fund in the portfolio, an offshore small cap growth fund.

Martha Harris Myron CPA CFP(tm) is a Bermudian Certified Financial Planner(tm) (US license) practitioner and VP, Personal Financial Services, Bank of Bermuda. She holds a NASD Series 7 license, is a former US tax practitioner, and is the 2001-The Bermudian Magazine - Best of Bermuda Gold Award for Investment Advice. Confidential Email can be directed to marthamyron@northrock.bm

lThe article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda. At the date of this article, the author held no position in the Sequoia fund, and a small position in Berkshire Hathaway B shares (BRK.B).