Standard & Poor's of New York is joining the growing number of companies that rank mutual funds and will soon be bestowing a "Select" status on mutual funds that meet its standards. S&P's expects less than 10 percent of mutual funds will meet its qualifications. The standards go beyond performance to scrutinize current and historical holdings, and management style.
S&P will publish its lists of "Select" mutual funds in various sector categories over the next few months, beginning with large-cap growth stocks this month, small-cap growth stocks in April and mid-cap growth stocks in May. Altogether, S&P plans to cover 15 sectors, including value, blend, international, fixed income and balanced funds.
S&P is aiming these rankings at financial professionals who do not have the time to thoroughly research mutual funds. The rankings will be available for a limited time free of charge. The company does not yet know what it will ultimately charge for this new service, but expects to address this issue after Labor Day.
"Investors and intermediaries rarely have the time or resources to dedicate to the in-depth research necessary to assess portfolio managers," explained Sandy Bragg, managing director of S&P's global mutual fund business. "However, assessing portfolio management is virtually mandatory for institutional investors, and Standard & Poor's is now making that level and quality of analysis available to brokers, planners and investors."
To qualify as an S&P Select fund, a mutual fund must be able to provide three years of performance data that shows it has out-performed its peers on absolute and risk-adjusted return.
If a fund meets these criteria, S&P will then interview and review the fund's managers to understand their investment philosophy, methods, experience and abilities.
Once a fund achieves S&P Select status, it will still be monitored monthly to insure it maintains a consistent investment style. The fund must also release its holdings to S&P each quarter. The company will update its Select lists for subscribers twice a year.
S&P's premise in taking such a hard look at a fund's managers is that analyzing past performance is not enough, because stellar performance is virtually impossible to maintain.
S&P believes mutual fund excellence means more than last year's track record, said Philip Edwards, managing director of S&P's funds group. Fund management experience, performance consistency and portfolio management discipline is equally if not more important, he said. Even top-ranked funds, in terms of performance, can turn out mediocre or even poor performance in two out of three years, he said.