Insight Into a Firm’s In-House Investing
Sometimes the best investment insight can be gained by following what the experts do, not what they say.
Consider the case of Morningstar Inc., a Chicago research firm that has gained a solid reputation for rating individual mutual funds. If you heeded Morningstar’s recommendations liberally and bought every fund with a superior five-star rating, you would wind up with more than 150 holdings spread across virtually every investment category. If you also included each portfolio with an above-average, four-star grade, you would need to make another 300-plus purchases.
With so many good funds available from these lists, how can you narrow your choices? One way is to examine where Morningstar’s 200 employees invest their own money--specifically, by checking the mutual funds available in the company’s 401(k) retirement plan.
Morningstar established its 401(k) program in early 1991, offering workers the option of investing in any of eight funds. A few of these portfolios might be considered mild surprises at first glance, but all share certain characteristics that any investor should consider when making mutual fund purchases.
One notable trait of the Morningstar 401(k) lineup is how equity portfolios dominate the list. Five of the eight selections are stock funds, reflecting the fact that stock market vehicles are well-suited for retirement and other long-term investment objectives.
“We have a young work force, with most of the people in their 20s and 30s,” says Don Phillips, publisher of Morningstar Mutual Funds, the company’s flagship publication. “For many of us, equity funds are appropriate.”
Three growth funds are on the list--Fidelity Disciplined Equity, Gabelli Asset and Gabelli Growth--as are a small-company portfolio, Janus Venture, and an international product, Vanguard World International Growth.
Morningstar employees can also select a corporate bond fund in T. Rowe Price New Income, a money market fund in Vanguard’s Prime Reserves portfolio and an income investment in Lindner Dividend. This latter choice holds a mixture of common and preferred stocks, convertible and regular bonds.
All eight funds are no-loads, although Lindner extracts a 2% redemption fee for investors who pull out within the first 60 days.
In addition, most of the funds don’t charge any 12b-1 marketing fees. The only exceptions are the two Gabelli portfolios, which levy a 0.3% yearly 12b-1 charge.
Most of the eight funds also feature modest annual expense ratios of about 1% or less. Moderate fees are a trademark of many of the best long-term performers.
Fidelity Disciplined Equity is an interesting choice in that it’s not among Fidelity’s biggest, best-known products. Some observers feel medium-size equity funds enjoy an edge over truly giant portfolios because they’re easier for the manager to maneuver.
Four of the five stock funds on the Morningstar 401(k) list are in the middling $450-million to $900-million range. The exception here is Janus Venture, which closed its doors to new investors when it passed the $1-billion mark.
Another trait of the 401(k) funds is managerial consistency. In general, the same person has been at the helm for at least seven years, or for the life of the fund in the case of younger portfolios.
Although several of these funds have shown a fair amount of volatility over time, most have tended to fluctuate less than their peers. This isn’t surprising, since Morningstar’s ratings favor funds that perform well for a given level of risk.
Vanguard World International Growth is the only selection lacking at least an above-average grade. Yet its three-star rating isn’t too bad considering most foreign-oriented funds have been lackluster in recent years.
“We felt it was very important to have an international choice,” says Phillips.
Although Morningstar doesn’t tell its employees which of the eight funds to invest in, or in what amounts, it does make financial literature available and conducts classes on investment topics.
Joe Mansueto, Morningstar’s founder and president, encourages everyone to take advantage of 401(k), 403(b) or related employer-sponsored retirement plans, if available. Along with tax-sheltered growth and tax-deductible contributions, many firms will match worker contributions, at least in part.
Morningstar, for instance, kicks in a dollar for every dollar an employee invests.
“That type of incentive, plus a good lineup of funds, has gotten everyone here thinking like investors,” says Phillips.
* Morningstar’s Picks Morningstar Inc., an independent research company that rates mutual funds, has chosen the following eight portfolios for its own 401(k) retirement plan.
Fund Name Investment Focus Phone Fidelity Disciplined Equity Mid-sized growth stocks 800-544-8888 Gabelli Asset Mid-sized growth stocks 800-422-3554 Gabelli Growth Mid-sized growth stocks 800-422-3554 Janus Venture Small stocks 800-525-8983 Income from convertible bonds and Lindner Dividend preferred stock 314-727-5305 T. Rowe Price High-quality New Era corporate bonds 800-638-5660 Vanguard World International International stocks 800-662-7447 Vanguard Prime Money market Reserves instruments 800-662-7447
Morningstar Fund Name rating Fidelity Disciplined Equity Superior Gabelli Asset Above average Gabelli Growth Superior Janus Venture Superior Lindner Dividend Superior T. Rowe Price New Era Above average Vanguard World International Average Vanguard Prime Reserves Not applicable
Note: Janus Venture is currently closed to new investors
