While not quite as scintillating as the latest Jonathan Grisham thriller, your mutual fund’s report, whether it’s annual or semi-annual, is your gauge to measure how the fund is performing. It’s probably not a great idea to peruse this report as nighttime reading – unless you’re looking for a new way to combat insomnia. Nonetheless you should find a quiet place to look over this document.
Among the most significant information within the report are the holdings of the fund. It’s important to look over this list carefully to determine whether or not the fund manager is “style drifting.” In other words, a fund that is supposed to be buying large-cap stocks may suddenly be investing in several smaller companies. It’s more likely, however, that the fund may have drifted in the other direction because, as noted earlier, small companies tend to grow—and they move from small-caps to mid- or even large-caps while still sitting in the same mutual funds. Naturally, if the fund is doing well you’ll be less concerned. It’s amazing how your perspective changes when looking at the holdings based on the fund’s performance. What looks like a brilliant move by the fund manager in a fund that has seen a 30 percent rise doesn’t look nearly as good in a fund that has seen a 10 percent drop. Some questions may arise: Is the fund satisfying my level of risk or is it becoming too aggressive or too conservative for me? Is the fund lacking in diversification by moving more strongly into similar stocks? The holdings will also tell you which companies the fund believes are strong. Look them over, and see if you agree. You may not know all of the companies held, but investigate a few.
Looking at the portfolio holdings, you want to find:
1. Familiar names. “Familiar” means for that type of fund. A household name like Coca-Cola won’t show up in a small-cap fund, but you are looking for smaller companies that belong in that fund. NOTE: Just because you own a fund doesn’t mean you no longer have to follow the activities of companies and their stocks. If you see holdings in your fund that you don’t like, you can look at other funds that have shares of stocks that you feel are more promising.
2. Portfolio concentration. Besides showing what is in the portfolio, the annual (or semi-annual) report will tell you how much, or what percentage, the fund is investing in each area.
3. Performance. Not surprisingly, for the funds that perform well this information sometimes jumps off the page, while it’s harder to decipher in a fund that is not performing well.
You should know how the fund has performed in the short and long term. How the fund has performed against a specific index should also be included for purposes of comparison. There should also be an explanation of WHY the fund has performed well or poorly. Which factors have made an impact on the fund? What management has been doing and some indication of what they are planning to do should be included.
The bottom line is that after reading the annual report you should feel either confident in holding onto the fund or determined to sell your shares. If you are left feeling unsettled as to what you should do (because you do not feel you have adequate information or the report is not easily discernable), then you should look in Morningstar, Kiplingers, the Wall Street Journal, or other sources to see if they discuss your fund. You should also call the fund or fund family and let them know you have some questions; after all, you are paying an operating fee that includes service charges, so let them serve you by providing some answers. If a fund does not help make you feel comfortable, then it’s not the right investment for you. Remember, it’s your money.