Time and again during the presidential election campaign of 1928, Alfred E. Smith, the Democratic candidate, said, “Let's look at the record.” The phrase became part of our political language. In the mutual fund field, too, investors say “Let's look at the record.” It is an important, if potentially fallible, step in the fund selection process. In this chapter, I shall first examine the major types of common stock funds and the ways to distinguish them. Next I will turn to the structural investment characteristics of stock funds. I will conclude by looking at the record and discussing the role of past fund returns in the selection process.
This chapter considers common stocks as a distinct asset class. There is no presumption that you have yet decided what portion of your total investment portfolio should be represented by common stock mutual funds. The allocation of dollars among the three primary classes of financial assets is an entirely different decision with its own unique considerations, and I will address it in Chapters 12 and 13.
Deciding which particular common stock funds to invest in is a challenge. Today there are some 1,400 common stock mutual funds. They tend to adhere to investment policies and objectives generally in line with broad strategic definitions. I divide common stock funds into five basic classifications, and indicate the number of funds in each category.
- Growth funds ...