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No. of Recommendations: 8
Well, to quote that article: "You've heard it from us before, and that's because there's no getting around it..."

When talking about comparing expense ratios, articles like this ALWAYS, I mean ALWAYS, use an index. I have seen an occasional article by readers of these boards that do a better job of comparing expenses, by using managed funds or some more useful basis of comparison.

But I am so tired of these repetitive, parrot-like articles that almost always compare VFINX against competitors' versions of an S&P index fund, and claim -- correctly -- that the expense ratio can make a difference in the ultimate returns to the investor. Who are the geniuses who think they're giving us fresh news with such things? I note that they do not mention tracking error, which could theoretically err in the favor of the investor in some competing fund. I would love to see these authors do the far more difficult math of working that into the equation, just for fun.

I have spent many hours running fund screens at M* for various different goals, based on different theories I've wanted to try out. I also like to second-guess my earlier choices to see if Fund XYZ really was the best one I could have bought last year in a particular category. Sometimes I find other good candidates that, on a performance basis, have done pretty well. So, sometimes when working on a different portfolio, I'll buy that other fund instead.

But then I start thinking that maybe I'm just buying the same stocks in a different basket. So I run the Morningstar X-ray to look for "stock intersection" AKA "overlap." And when it comes to managed small-cap funds, I find that I can often toss three or four or more of them into the hopper and find almost no overlap AT ALL.

This situation is nearly 100% different than that of index funds that track the identical bogey and therefore supposedly represent the same collection of stocks! So if you are buying managed funds, it is really, really difficult to pull the expense ratio out of the mix and blame performance on that factor, when in reality, the manager's choice of stocks in the portfolio has more impact on good or bad performance.

This article has similar weaknesses in simply repeating the typical fluttering of hands about turnover, and manager tenure, and so on. Three things can happen when a new manager takes over: the fund can get better, or worse, or stay the same. I'm sure that somebody must have done a serious analysis of such things, but if so, articles like this one never cite them. So has anybody actually demonstrated that "new management" is *always bad* for a fund? Or does it turn out, as I suspect, that the impact of a new manager is not, by itself, an automatic indicator of decreased performance?

These articles just parrot each other. One gets the really strong impression that the author's research is limited to reading other articles by similar people, who in turn were just parroting things they saw in other people's articles, on and on. Rarely do I see evidence that they have actually dug into hardcore research, particularly newer research with more rigorous standards, or research that takes new market realities into account.

For example, the lazy writing in this one makes it sound like buying into particular foreign markets is a "fad" being hyped by fund companies disinterested in their investors' welfare: "Be wary of funds that focus on one part of the economy, one foreign market, or that bet on the economy or the dollar going one way or the other..."

We recently discussed a similar idea here, and I agreed in a way, by suggesting an Asian fund rather than a purely Chinese fund. But if you think about the rest of that sentence, it is a contradiction to another common chestnut that you hear all the time: that you should shift from stocks to bonds as you get closer to retirement age, as a way of avoiding risk -- and specifically, to preserve capital. Well, that is nothing if not a "bet on the economy" -- it is a bet that the economy will remain stable and that bond markets will behave predictably.

Anyway, the one thing I agree with is that one should not place too much faith in the star ratings of funds, as provided by Morningstar in particular. I don't know enough about Lipper ratings to comment. But I will note that S&P's star ratings *of mutual funds* (not of stocks) seem to be based almost entirely on quantitative measures, not subjective opinions of analysts. So if one finds funds that are rated highly by more than one system, using different sets of criteria, I think one can start to put some credence in the results.

As for M* itself, I am willing to give them enough slack that if I use star ratings in a screen, I am confident enough in them that I will rule out two-star funds, and not worry about missing a diamond-in-the-rough! And although it is true that the ratings are historical -- that is, backward-looking -- one wonders why the same logic would not apply to management change. If a fund has done well and has a high rating, but does not deserve investor confidence on that basis alone, then why does the manager deserve investor confidence for having stayed at that fund for the period of good perfomance? This is a double standard. If the star rating is a worthless criterion, then management tenure would seem to be tarred by that same brush.

I think MY advice is to ignore ALL advice you hear or read -- including this message. <g>
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