No More Stars, Diamonds or Smiley Faces

When selecting mutual funds, whether for an individual or a company’s 401(k) plan, it’s best to strictly adhere to acomprehensive list of criteria.  While no one can (or should) guarantee performance, a diversified portfolio of “best in class” high quality funds that are regularly monitored for compliance to that criteria should serve all parties well.

Here are the criteria that should be measured:

1. Risk-adjusted Performance Relative to Peers (measures Alpha and Sharpe Ratios)
2. Performance Relative to Peers Over 1, 3 and 5 years (apples to apples)
3. Expense Ratios
4. Style Consistency (measures style drift)
5. Assets in the Fund (should be of a minimum size)
6. Stability of the Organization (manager tenure)
7. Regulatory Oversight (should be managed by a bank, trust company, insurance company, or mutual fund)
8. Minimum Track Record (no startups)


The days of choosing a fund by the number of stars, diamonds or smiley faces are long gone.  These criteria should be found in your Investment Policy Statement (IPS).  Check yours!”

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.