Start with the Name & Description to Get the Mutual Fund Basics Right
By: Robert F. Abbott, freelance writer and author of Big Macs & Our Pensions
Do you get frustrated when trying to figure out the mutual fund basics such as the name and description? You would think these would be simple issues, but they demand our attention if we’re to get our fund research started on the right foot.
In a series of articles, starting with this one, we will provide strategies for assessing mutual funds, with the goal of helping you make sense of any fund. Here are the other articles in this series:
What we learn from the analysis in this article should work with most fund names and descriptions. In this one, we look at T. Rowe Price Institutional Large Cap Core Growth Fund (fund symbol TPLGX).
I selected the fund for this article somewhat randomly, and picked it to illustrate key points, rather than make a recommendation. Similarly, while I use information from the U.S. News & World Report website, I might have chosen any of dozens of other websites with similar information.
One more thing before we get to the meat of the issue: funds can move up and down the rankings every day that the markets open. When the stocks within a fund fall, the value and the price of the fund fall. When the prices of the stocks within the fund go up, the value of the fund goes up. So today’s star can become tomorrow’s dog and vice versa.
Lists of Top Mutual Funds
Many websites offer lists of the top mutual funds, but as I pointed out in an earlier article about top mutual funds, what may be a top fund for one investor may not a top fund for another. Each of us has unique needs and issues, and so finding your top funds will require a personal journey.
So, let’s go to the U.S. News & World Report website, and successively click on the tabs for Money, Investing, Mutual Funds, and Best Mutual Funds.
Scrolling down from the top of the page, you will see Most Popular Mutual Fund Rankings. We’ll click on Large Growth, which will take us to a list of top mutual funds, based on U.S. News and World Report’s methodology (built mainly on ratings by several third-party experts).
First on that list is the T. Rowe Price Institutional Large Cap Core Growth Fund. When we look at its performance (which we will in a later article) we note it has done well over the years, although less so in the past year.
Deciphering the Name
After figuring out what the name and description mean, we should have a solid overview of this fund, and know whether it should go onto our short list. Let’s first dissect the name of the fund:
- T. Rowe Price: the mutual fund company that developed and sells this fund, and one of the largest fund companies in the U.S.
- Institutional: this means a fund for pension funds and other big institutions that invest on behalf of others, including banks and insurance companies. But, can we, individual investors, buy into it? To check, we go to Yahoo! Finance, enter the symbol and read the fund’s Profile. Minimum investment, $1-million dollars so we might be tempted to cross it off our short-list. But, scroll down and you see that 33 brokerages sell the fund for T. Rowe Price; click on 33 brokerages for a list of the brokerages (none that apparently sell to individual investors).
- Large Cap: Only big corporations. We will look at the list of the fund’s biggest players in a future article, but for now think of giant corporations like Amazon and Google. We won’t sweat the technical details here.
- Core: Usually this means something conservative and safe, but since this fund also focuses on growth stocks, we face something of a contradiction. As Morningstar notes, . . . large-growth funds don’t have the best temperament for core holdings; they tend to have bigger mood swings than their blend or value counterparts. Their highs are nice–they mean higher returns at certain points in time–but when they’re down in the dumps, that spells bigger losses than you might want at the heart of your portfolio.” My conclusion: not really a core holding in the usual sense.
- Growth: Investopedia says of growth funds, “Most growth funds offer higher potential capital appreciation but usually at above-average risk. Growth funds are more volatile than funds in the value and blend categories. The companies in a growth fund portfolio are in an expansion phase….” Note that these funds target capital gains (selling stocks within the fund for more than they cost), pay low or no dividends, and have an edgy risk element. This kind of fund then, might suit an investor who has not yet retired.
- TPLGX: The fund symbol. If you go looking for more information about this fund, you would type in the symbol rather than the full name (at a website like Yahoo! Finance).
As you have seen, we can learn a lot from just the fund’s name. Here, we learn we might have difficulty finding a broker who would sell it to us. We also note it aims at a compromise between risk and return; whether that sort of compromise works for you will depend on your goals and risk tolerance.
Deciphering the Description
We find the description underneath the Summary heading:
“The investment seeks to provide long-term capital growth through investments in the common stocks of large-cap growth companies. The manager follows a growth-oriented approach to stock selection and expects to normally invest in stocks of approximately 100 to 130 companies. The fund will normally invest at least 80% of its net assets (including any borrowings for investment purposes) in large-cap companies. The managers define a large-cap company as one whose market capitalization is larger than the median market capitalization of companies in the Russell 1000 Growth Index, a widely used benchmark of the largest U.S. growth stocks.”
Reading through this, we find that the name of the fund describes the nature of the fund quite well, but we pick up a few more points:
- Long-term capital growth: another way of describing what we saw in the Growth section above, a mutual fund that focuses on capital gains rather than dividends. In other words, not an income stock, and to make the most of it you should expect to hold it for a number of years.
- Growth-oriented approach to stock selection: it chooses stocks based on their potential to grow, as opposed to their potential for risk reduction or dividend payments (income).
- At least 80%: the fund will stick closely to its mandate and will not buy other types of stocks, even if they offer tantalizing short-term opportunities.
- Market capitalization: refers to the value of a company based on its price per share and the number of shares it has issued. For example, The Walt Disney Company has 1.63-billion shares and a price per share of $98.24. That gives it a market cap, or capitalization, of $160.3-billion (based on information at Yahoo! Finance at the close of trading on March 15, 2016).
- Russell 1000 Growth Index: a more aggressive (meaning riskier) index than the S&P 500, home of the biggest 500 American corporations.
Mutual Fund Basics: Conclusion
We’ve learned quite a bit from this expedition into the first of the mutual fund basics: name and description of the fund. Even though few of us are likely to buy this fund, it has served its purpose in giving us insight into the way names and descriptions work.
This type of scrutiny should give us an idea of whether we would like to invest in a fund, or at least provide a foundation for further investigation.
It’s a learning exercise that should help you understand the names and descriptions of other mutual funds. No doubt you’ll come across new terms, but you can get definitions quickly by going to a search engine and typing in “mutual funds” + the term you want explained (without the quotation marks).
Remember, too, that deciphering a name or description involves process more than anything. Work through them methodically and carefully to capture the intent and nuances they communicate.
With the ability to understand mutual funds at this level, you are well positioned to begin examining lists of funds, and making meaningful progress toward your ultimate selections.
Next . . .
Robert F. Abbott is a freelance writer; see his profiles and analyses of value stocks at GuruFocus.com . He is also the author of Big Macs & Our Pensions: Who Gets McDonald’s Profits?
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- Discover the Ownership Revolution, and what it means to your retirement funding.
- Find out how much of your lunch bill is a profit for McDonald’s, and who gets the profits.
- Learn how corporate profits fuel one of the greatest social programs ever developed.
Click here to read a free preview at Amazon.com