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Kinnel's Tips on Do-It-Yourself Fund Screens

Be open to passive and active investing

Russel Kinnel 07.12.2017

Fund industry has grown massively, and it has changed to a better-run, more professional, and lower-cost business where leadership is more robust and less personality-driven. That’s all to the good, even if it means the fund world is a little duller. Funds are better at spelling out how they invest, and technology makes it easier for us to see what our entire portfolio of funds and stocks looks like together. A subtle change is that investors continue to use funds to add more diversification. Hence, what indicators investors can use to screen and select the most ideal funds? Morningstar Manager Research Direcor Russe Kinnel shared his tips on finding the most ideal funds; on the other hands, he shared lessons he learned over the years on investments.

Tips on screening active funds

If I'm crafting my own screen for mutual funds, what are the data points that I should be sure to embed in whatever screen I'm running? Low expenses tend to predict better performance, so expense ratios are a good starting point; and compare them with an average.There other factors at the same time are widely accessible, which can make decent components of screens. Manager tenure is a good one, and essentially five-year manager tenure is ideal. Also rather than looking at a standardized time period, look at the period of the manager's tenure. It is not that as predictive value, but if you're looking for new fund ideas that would be helpful to narrow the list.

Now, let's talk about performance, because a lot of times at the top of screening tools that you might use, you might see that you can screen on three-year or five-year performance. But Kinnel would not put a big emphasis on performance. In his opinion, you could say, I want funds that returned more than 8% a year over the last five years, which to him is really silly because it doesn't tell you if that's really good performance or really bad performance relative to a peer group. It could be too short term. He personally doesn't really like three or five years. Also, past performance obviously just has some limits. You don't want to lean too heavily on past performance because it's not a very good predictor on its own.

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About Author

Russel Kinnel  Russel Kinnel is Morningstar's director of mutual fund research.

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