The Discerning Investor by Julie Jason

What Matters Most When Choosing a Mutual Fund

I recently had a conversation with a Connecticut reader about balanced mutual funds. The objective of a balanced fund is to “seek” both income and capital appreciation.

We talked about how to do a screen. The first step is to get a sense of the universe.

Using a database such as Steele’s Mutual Fund Expert (, you can narrow the field to similar funds.

Filter for “balanced” as the “objective,” and “allocation” as the “category.” Objectives are the goals the fund is organized to accomplish. Categories break down funds into peer groups based on their holdings, according to Morningstar, the independent research house. The allocation category invests in multiple asset classes (stocks, bonds and cash).

These filters provide a basic screen, which I ran using Steele’s June 30, 2020 database. The screen yielded 424 funds. Most had equity allocations of 50-70%. Equity allocations tell you how much the fund invests in equities compared to fixed income investments. The higher the equity allocation, the higher the risk -- and the potential return.

To further narrow the list, I filtered by “best-fit index.” The best-fit index provides a more refined measure of how similar a fund is to another (correlation coefficient or r-squared regression of the fund against an index).

The best-fit indexes for the balanced fund list included the S&P 500 Index, the Russell 3000, the ICE BofA US High Yield Index, with the largest representation being “Morningstar Lifetime Mod 2030” (a target-date fund based on a retirement year of 2030). Using the latter narrowed the field to a more manageable list of 72 funds. By adding an additional screen (3 year alpha greater than zero), my list resulted in 29 funds. (You can think of alpha as a measure of success.) By excluding extra share classes of the same fund, I was down to 10 choices, representing seven different managers.

Even though this filtered screen was tight, using only like funds, the ranges of data points diverged quite a bit.

Total operating expenses ranged from a low of 0.09% per year to a high of 2.5%. Yields (12 months) ranged from a low of 0.91% to a high of 2.23%.

During the last down-market cycle reported by Steele (October 2007 to February 2009), the best performer lost 24.4%; the worst lost 37.2%. During the up-market cycle (March 2009 to February 2020), the highest performer returned 249.4%; the lowest returned 161.3%.

Three-year cumulative returns provided another data point. The highest had an 8.25% average annual return; the lowest had a 5.9% average annual return.

What does this say about balanced funds? They are not all alike.

All of this data is backward-looking, meaning it’s historical. The big question for an investor is how current portfolio decisions are being made. As a result, what matters most is the fund’s managers. That is, when you buy a fund, you are buying the style and skill set of the manager.

One of the best ways to get a sense of how managers differ is to “listen” to them.

Before the world “went virtual,” I attended the annual Morningstar Investment Conference in Chicago in person each year to meet and speak with the pros behind the funds. Due to the coronavirus, you can now “meet” portfolio managers from the safety of your home -- something I highly recommend self-directed investors do before choosing a fund manager. One option is Morningstar’s 2020 Digital Conference, which is scheduled for September (

Research is only the first step to finding funds that you want to hold. Retirees (and future retirees) will want to build out portfolios for themselves using funds along with other investments in order to meet their personal goals. That takes an understanding of what funds can do for you, which is part of the overall “job” of your personal portfolio manager, whether you yourself are in charge or you delegate that job to a professional.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments ( Please visit