Investors who enter the mutual fund market are often confronted with a bewildering array of information and jargon that leaves them unsure of where to begin. Mutual fund websites are filled with information about large-cap funds, small-cap funds, sector funds, alpha, beta, style boxes, and other esoteric concepts.
Brokers and financial planners readily recommend any number of funds and fund families for their clients, but some investment companies have much better track records than others. So where can customers go to get sound, unbiased information about a given fund or fund family? Read on to find out.
A Definitive Resource
For decades, Morningstar has been regarded as the premier source of information on mutual funds in the financial industry. The first mutual fund sourcebook was published in 1984, and this resource has come to be used worldwide by millions of investors and thousands of financial advisors. Morningstar ranks, rates and analyzes thousands upon thousands of mutual funds, both load and no-load, as well as variable annuity subaccount funds. Many local public libraries offer access to the Morningstar service.
One of the major tools that Morningstar offers to investors is its one-page fund fact sheet. This sheet is packed with pertinent information about a given fund that allows investors to quickly evaluate its potential. Some of the data featured on this sheet include those listed below.
Morningstar Style Box
This common tool classifies mutual funds into one of nine different categories, with separate sets of categories for equity and fixed-income funds. For example, a stock fund could be classified as a large-cap growth fund or a small-cap value fund, depending on its capitalization and investment objectives.
Vital Statistics
Every fact sheet lists the fund's contact information, inception date, total assets under management and minimum initial and subsequent purchase amounts at the bottom of the page, along with a complete breakdown of the fund's sales charge schedule (if there is one) for all share classes. All management and 12b-1 fees are included here as well.
Historical Performance
Morningstar fund fact sheets always display the average annual total return of the fund for the last three and six months, one, three, five, and 10 years, as well as since the fund's inception. These numbers are run both with and without any pertinent sales charges being assessed for all classes of retail shares (and even institutional share classes as well in some cases). Cumulative total return numbers are also posted. Quarterly returns are shown for the previous five years.
Growth of $10,000
Each report contains a graph that charts the growth of a $10,000 initial investment made at the inception of the fund until the present, factoring in all sales charges and other expenses.
Star and Category Ratings
These are often the first indicators that investors look at when choosing a fund. The star rating ranks funds according to past performance within four broad asset classes, while the category rating is a more specific comparison of funds within the same style box.
Fund Composition and Holdings
A percentage breakdown of the individual security holdings within the fund by both asset class and sector is listed in detail. Each fact sheet also lists the fund's top 10 holdings by company. Bond and other fixed-income funds also contain a breakdown of the average duration and maturity of the individual securities held by the fund.
Investment Objective
Every fact sheet prints the stated investment objective of the fund and the general investment strategy that will be used to achieve this objective.
Morningstar's Take
This portion of the fact sheet offers a brief commentary on the fund and the performance of its portfolio managers, and generally offers an opinion of the future performance of the fund for both the short and long term.
Technical Data
Morningstar analyzes a number of technical indicators for each fund, such as its Sharpe ratio, beta, alpha, and other mathematical quantifications of the fund's risk, volatility and reward. These are always listed in a separate section as well.
Special Considerations
There has been an important change to the rules surrounding annuity investments in retirement accounts. In 2019, the U.S. Congress passed theSECURE Act, which made rule changes to annuities in retirement plans. Annuities are now more portable, meaning your 401(k) annuity can be rolled over into another plan when you change jobs.
The law also reduces legal risks for annuity providers by imposing limitations on whether an account holder can sue the provider in the event the company can't make the payments due to bankruptcy. Investors should consult a financial professional to review the new rules as a result of the SECURE Act.
Reinventing Itself
Morningstar went public in 2005. Since then, the company has continually refined and expanded its suite of products and services. Its services now extend beyond simple analysis and include sophisticated money management software for financial planners and X-ray portfolio analysis services that allow planners and investors to see the potential overlap of holdings within their investment portfolios, adding additional tools to investors' arsenal.
