Decoding Fund Reports
Your mutual fund's annual or semiannual report is a tool used to measure how the fund is performing. Among the most significant information within the report is the fund holdings section. Look over this list carefully to determine whether the fund manager is “style drifting.” In other words, a fund that is supposed to be buying small-cap stocks may suddenly be investing in larger companies; or a corporate bond fund may suddenly be stocking up on treasuries.
Some questions may arise: Is the fund satisfying my level of risk, or is it becoming too aggressive or too conservative for me? Is the fund becoming less diversified by moving more strongly into similar stocks? Does their current asset allocation negatively impact my asset allocation plan? The holdings will also tell you which companies the fund believes are strong. Look them over, and see if you agree. You may not know all of the companies held, but you should investigate a few.
When looking at the portfolio holdings, you want to find out this important data:
Familiar names. A household name like Coca-Cola won't show up in a small-cap fund, but you are looking for smaller companies that belong in that fund. Just because you own a fund doesn't mean you no longer have to follow the activities of companies and their stocks. If you see holdings in your fund that you don't like, you can look at other funds that have shares of stocks that you feel are more promising.
Portfolio concentration. Besides showing what is in the portfolio, the report will tell you how much, or what percentage, the fund is investing in each area.
Performance. Not surprisingly for funds that perform well, this information sometimes jumps off the page. It can be harder to decipher in a fund that is not performing well.
You should know how the fund has performed in both the short and long term. How well the fund has performed compared to a specific (and relevant) index should also be included for analysis purposes. There should also be an explanation of why the fund has performed well or poorly. Which factors have made an impact on the fund? The report should describe what management has been doing and should include some indication of future plans.
After reading the annual report, you should feel either confident in holding onto the fund or determined to sell your shares. If you are left feeling unsettled as to what you should do — because you do not feel you have adequate information or the report is not easily discernible — you should consult print or online sources such as
