Mutual Funds: Portfolio Structures, Analysis, Management, and Stewardship

CHAPTER 10

The Morningstar Approach to Mutual Fund Analysis—Part II

DON PHILLIPS Managing Director, Corporate Strategy, Research, and Communications, and President, Fund Research, Morningstar, Inc.

 

PAUL D. KAPLAN, Ph.D., CFA Vice President, Quantitative Research, Morningstar, Inc.

 

 

 

In Chapter 9, “The Morningstar Approach to Mutual Fund Analysis—Part I,” we focused primarily on returns-based analysis tools. But equally if not more important are tools that allow you to understand the contents and not just the past behavior of a mutual fund. In this chapter, we focus on holdings-based analysis as well as several important qualitative factors.

HOLDINGS-BASED ANALYSIS

Just as most professional stock pickers agree that it is impossible to pick securities based solely on their past performance patterns, we at Morningstar have long argued that successful fund investing must go beyond checking last year’s leaders’ lists to incorporate fundamental analysis of funds’ holdings. True, looking at returns and volatility for any given time period can provide important clues about certain funds and market trends. That is why Morningstar provides the returns-based analyses we described in Chapter 9. But to truly understand a fund and the role it might play in your overall portfolio, you have to drill down into its holdings, understand the manager’s strategy, assess the shareholder-friendliness of the fund company, and evaluate the fund’s risk level. Furthermore, funds are not static; styles ...