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

CHAPTER 11

Building a Portfolio of Mutual Funds A Morningstar Approach

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

 

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

 

 

 

In Chapters 9 and 10, we discussed in detail many of the tools that can be used to analyze and compare mutual funds. In this chapter, we address how you can apply similar principles to the portfolio construction process so you will not end up with a basket of funds that look good in isolation but may not be as attractive when combined together in a portfolio.

APPROACHES TO PORTFOLIO CONSTRUCTION

As mentioned earlier, we believe that portfolio assembly is more art than science and that much of its success depends on selecting the proper level of complexity. Investors desiring maximum simplicity might choose a target-date fund, where asset allocation, fund selection, and rebalancing are all handled for them. Investors wanting more customization or control can construct portfolios with index (passively managed) mutual funds, actively managed mutual funds, and/or individual stocks and bonds.

If you decide that you are most interested in selecting a suite of actively managed funds to meet your desired asset allocation, there are several ways to go about it. One common approach is to combine top-down asset allocation and bottom-up fund selection. The top-down process of determining an asset allocation ...