401(k) Part II - Analysis of Funds

I started contributing to my 401(k) as soon as I started my first job. It was a little daunting trying to figure out what mutual funds to invest in.

As I was just starting to invest, I wanted to look at some resources to evaluate my options, and to figure out how to allocate my investment.

Morningstar

Whenever I consider a fund, I look at the rating from Morningstar. Morningstar is an independent investment research firm that when rating funds, looks at peer data for similar funds and rates their performance against such peers. Their ratings system is very simple, they give a mutual fund between 1 star (worst) to 5 stars (best).

For instance, I currently invest in Perkins Mid Cap Value T (JMCVX)*, and Morningstar gave it 5 stars.

Expenses

What is the expense ratio for the fund? I look for expense ratios of 1% or lower, unless it is an exceptional fund. The Perkins fund actually has an expense ratio of 1.11%, which is higher than my targeted expense ratio, but it was the only good mid-cap value fund option. I like to allocate my investments across different types of funds (large-cap, mid-cap, foreign stocks and bonds), which I will discuss later.

Manager

If' I'm looking at the past returns, I am also looking at the manager. Although past returns is no guarantee of future performance, if the fund has the same manager in the past, then there is some assurance that the guiding principles for the manager will still apply and the performance for the fund will likely be consistent; however, if a new manager has taken over, then past performance has no value. The Perkins fund has two principal managers, who had been there at least since 2002.

Style Map

I look at the character of the fund, whether it primarily invests in large-cap, mid-cap, foreign companies or bonds. The Perkins fund was considered to be a mid-cap value fund, which means the managers look for mid-sized companies that have a potential for growth.

Performance

Although past performance is not indicative of future performance, I generally look at the track record for as long as the manager has been with the fund. For instance, with the Perkins fund, I looked at past performance for the past year, and for the past 5 and 10 year and since its inception since one of the managers had been there since its inception. Comparing its performance against an index fund is also informative (on the Janus site, it compares the fund to the Russell index). Since its inception, the Perkins fund had returned 11.92% since 1992, as compared to the Russell index fund, which generally returned 6.76%. Not bad.

* this is not an endorsement. This reflects my own personal investment and opinion about the fund. Please invest at your own risk.