When evaluating your fund's performance, be sure that the benchmark the fund chooses is appropriate for its style. For example, a technology fund shouldn't compare itself to the S & P 500 and nothing else; it should measure its performance against a technology benchmark.
In addition to benchmark comparison, the report should give you an idea of how the fund has performed over various time frames, both short and long.
Funds often list the portfolio's largest holdings and provide some information about what these companies do or why the manager owns them. Some reports will also indicate, via a pie chart or table, the sectors in which the fund is heavily invested.
This general overview is complemented by a full list of the fund's portfolio holdings -- including stocks, bonds and cash -- as of the date of the report. These holdings are usually segmented by industry. (Foreign funds may segment by country.) While you might not recognize all the names of the stocks in the portfolio, this listing is useful if you're wondering whether the fund is holding many names in one industry or making a few large selected bets.
Don't forget to read the fine print.
In the footnotes, you can find out if fund managers are practicing such strategies as shorting stocks or hedging exposure to foreign currency, which can significantly affect the fund's performance.
A fund's annual report concludes with its financial statements. Brace yourself: There's a lot of data here. In fact, this is where we get a lot of the data for the fund data reports shown on Morningstar.com and, if we do say so ourselves, we do a pretty good job of clarifying that data and putting it into context.
However, if raw numbers are your thing, you should take a look at the following: First, examine what's known as the fund's selected per-share data. This is usually the last page of actual information, located just before the legal discussion of accounting practices. Here you'll find the fund's net asset values, expense ratios and portfolio turnover rate for each of the past five years (or more).
Check to see if the fund's expense ratio has gone down over time (we hope it has) and whether its turnover rate has changed much (if so, you may want to find out why).
Cost-conscious investors can check out the breakdown of fund's expenses, including management fees, under the Statement of Operations. In addition, you can find out how much in unrealized or undistributed capital gains you're facing, using the Statement of Assets and Liabilities. (A gain is unrealized when a stock has gone up but the fund hasn't sold it. As soon as the fund sells the stock, it becomes a "realized" gain, which has to be distributed to shareholders. We explored this concept in Funds 104.)
What to do next
You can request a prospectus, SAI or annual report by phone, via direct mail and sometimes by e-mail. Many funds also make this literature available for download at their website. All mutual funds file their prospectuses, shareholder reports and SAIs with the SEC. You can view these at the SEC website.
While we suggest that you begin your fund evaluation with these documents, we don't think you should stop there. Seek out third-party sources, such as Morningstar, to help put your fund into context. Compare what you learn with other funds that have similar investment approaches. You should evaluate how costs stack up, whether your fund's performance is competitive and if it sufficiently compensates you for the risks it takes.
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