Don’t Judge A Mutual Fund By Its Name

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So you’ve designed the perfect asset allocation. You’ve carefully chosen each of your mutual funds. And you religiously invest in each fund to build your wealth, one dollar at a time. The problem is, the mutual fund that describes itself as a “Small Cap Value” fund turns out to be a mid cap blend fund. How did that happen?

By SEC regulation, mutual funds must invest 80% (note, not 100%) of their assets in the strategy advertised in their name. So a fund described as an emerging market fund must invest at least 80% of its assets in the emerging markets. In the case of a small cap value fund, investing up to 20% in mid-cap or even large-cap growth funds could cause the fund overall to slip into the mid-cap blend category. The result is an asset allocation other than what you had planned.

So how do you protect yourself against these migrating funds? As further discussed in the series on Making the Most of Morningstar, there are a couple of simple steps you can take to make sure your mutual funds invest as advertised and keep investing as advertised. Here they are:

  1. Check the style box of a fund before investing: simply type in the ticker symbol of a fund in the Quotes box at the top left of Moringstar’s home page, which takes you to the fund’s Snapshot. From there, scroll down to the Portfolio Analysis section of the snapshot.
  2. Use Moringstar’s Portfolio Allocator Tool: Once you’ve registered with Morningstar (it’s free) and entered your portfolio, which is described in Making the Most of Morninstar: Portfolio Manager click on tools and then select the Portfolio Allocator Tool. This tool will show you the current allocation of your portfolio and allow you to enter a target allocation for comparison.
  3. Monitor news about your mutual funds: As part of Morningstar’s portfolio manager, it will alert you to news items about the mutual funds yoou’ve intered into portfolio manager. These news alerts include any changes in the style box for the mutual funds in your portfolio manager. This is perhaps the easiest way to keep an eye on your fund’s investment style.

Happy investing!

Published or Updated: April 3, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

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