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Week of January 18th, 2008 • Previous QuestionMs. Sabella has managed MainStay Balanced Fund since its inception in 1989. She is a Managing Director and has been with NYLIM since 2000. Prior to that, she worked at Towneley Capital Management, Inc. for 22 years. Ms. Sabella is a member of the Financial Planning Association, Financial Women's Association, and the CFA Institute. She holds a B.B.A. from Baruch College, is a Certified Financial Planner, and is a Chartered Retirement Planning Counselor.
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Q:I've seen a lot of advertisements in newspapers and magazines promoting 4- and 5-star rated funds. Are these funds really that much better than other funds? Should I consider changing my portfolio to include more of these funds?
A: Don't get star struck. The advertisements you see are most likely based on Morningstar ratings, which are used in he financial industry to measure a fund's historical performance.
Basicially this means that the ratings are backward-looking, quantitative measures of past returns that are adjusted for risk and sales changes. So be careful. While Morningstar's rigorous process does provide you with a good measure of how the fund has performed over time against its peers, it does not give you a strong indication of how it will perform in the future.
Because Morningstar's Fund ranking system is based on the fund's relative performance within category over the past three, five, and ten years, it doesn't reflect recent fundamental changes, such as manager changes or asset size. So while it can be used as a screen to help narrow your choices, you shouldn't rely on it solely to make your investment decisions.
To make a more informed decision, you really need to take into consideration qualitative or subjective characteristics of the fund, which includes understanding the portfolio manager's investment philosophy, the fund's organization structure and management, the competitive advantage the fund offers over its peers, etc. Combining both qualitative and quantitative analysis will help you ensure that are you choosing the right funds for your portfolio, but you have to understand a little bit about how they work to make good use of the information. For more complete information on Morningstar rankings, go to Morningstar's Web site.
This article is intended to provide general information only and is not intended to provide investment advice or any recommendation to buy, sell or hold securities. The content of this article is not appropriate for the purposes of making a decision to carry out a transaction or trade, nor does it provide any form of advice (investment, tax, legal) amounting to investment advice or make any recommendations regarding particular financial instruments, securities, investments or products. Any information herein has no regard to the specific investment objectives, financial situation, or particular needs of any specific investor, and investments discussed may not be suitable for all investors. Neither NYLIM nor New York life will be liable for any errors or inaccuracies in such content or any actions taken in reliance thereon. As a registered investment advisor, NYLIM may render investment advice for compensation only as permitted under applicable US and state law.
Questions will usually be answered within the next bi-weekly posting of Ask Joan. If a question is particularly involved, or the answer depends on the specific circumstances, it may be possible to give only a very general answer. In these cases, you will be advised to seek more specific advice.
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