Master Of Your Domain These mutual fund rating services can help you take control of your financial future.

No matter what kind of survey it is, there's nothing likebeing number one. Sadly, most mutual fund managers and their fundscan't claim the top position that "Seinfeld" did forthe past several TV seasons. And, fortunately for investors, fundmanagers don't generally command the fees that Jerry, Elaine,George and Kramer did. It's easy to rate a TV show as not veryimportant (except to the sponsors), but when it comes to ratingmutual funds, that's no laughing matter.

So what's the deal with all these fund ratings? I mean, itseems as if everybody is getting into the act. You expect it frompublications like Business Week, Forbes,Barron's,Money, and The Wall StreetJournal. But when you see a list in Golf Digest, you mayfind yourself chanting, "Serenity now!" as you pore overthe lists. Which list is best? Which company provides the bestservice? You don't have to wait for Festivus to find out.

Lorayne Fiorillo is a financial advisor and first vicepresident of investments at Prudential Securities Inc. Pastperformance is no guarantee of future returns, yadda, yadda,yadda.

Get Out! Of Your Investment Rut

Looking at the fund rankings in popular magazines or newspapers?Many of them use information compiled by Lipper Analytical ServicesInc. in Summit, New Jersey. If it's ratings you want, though,you're in the wrong place. "We don't rate mutualfunds, we rank them," says Lipper's Melissa Daly."Rating is sometimes confused with an opinion. You can rate arestaurant or a movie, but in ranking something, you're placingit against its peers."

So how does Lipper rank funds? Daly cites the A-B-C-D-E systemused by The Wall Street Journal (compiled from Lipper'sinformation). These letters represent a performance quintile; fundsin the "A" category are those that perform in the top 20percent; "B" denotes the second 20 percent, and so on,down to "E," the bottom 20 percent of funds for aparticular time period.

Daly notes that other mutual fund information services use aquartile system. Not that there's anything wrong with that, butin her opinion, it isn't as accurate. With a quartile system,one basis point difference in performance can move a fund from abottom ranking to a top ranking. Lipper's ranking system, whichbreaks funds into five tiers, shows investors that managers whosefunds fall in either the "A" category or the"E" category are doing something very different fromthose who fall in the middle quintiles. Daly contends,"It's a lot more difficult to figure this out ifyou're just dividing your funds into four parts."

No Stars For You

You may not be seeing stars when you look at your fund, but whenused properly, Amy Arnott, editor of Morningstar MutualFunds and Morningstar No-Load Funds, contends that herfirm's "star" evaluations are a good starting pointfor investors who want to order up the right fund.

Unlike Lipper's performance-based ranking system,Morningstar's recipes are based on risk-adjusted performance.The universe of open-end mutual funds is divided into four broadgroups: domestic stock funds, international stock funds, taxablebond funds and municipal funds. Star ratings have two parts: thereturn component and the risk component. Morningstar's returncomponent is a measure of a fund's return relative to its starrating group, adjusted for sales charges. Morningstar's riskcomponent is calculated by judging a fund's performance againstthat of the 90-day Treasury bill, which is considered to be analmost risk-free investment. While many other calculations go intothis formula (we don't want to be responsible for giving awaythe recipe, but we have it on very good authority that you can findit on http://www.morningstar.net/InfoDesk/InvestFAQ.html,stars are assigned by subtracting a fund's risk score from itsreturn score and then ranking it against funds in the same group.The top 10 percent of funds rated are awarded five stars, the next22.5 percent receive four stars, the middle 35 percent get threestars, the next 22.5 percent receive two stars, and the bottom 10percent are awarded a single star. Funds must have at least athree-year track record to be included.

What's the big deal about stars? I mean, you can't eatthem, can you? According to Arnott, stars aren't the secretingredient. Check out a fund's Morningstar rating sheet, andyou'll find lots of crucial ingredients: a written fundanalysis that discusses how the fund is managed and what investorscan expect from management; charts that show fund performance overtime and vs. an appropriate index; the "style box," atool that represents a fund's characteristics in graphic form;and many other components that help investors get a fund'sflavor.

All this information is great, but will it help you choose theright fund? "When you're looking at straight totalreturns, there's no predictive value," says Arnott."When you look at the top funds over a five-year period, itdoesn't tell you about what's coming."

Morningstar's ratings, unlike rankings based solely onperformance, give you an idea of what to expect from a fund so youcan match it with your goals and risk tolerance. "Risk is morestable over time," Arnott notes. "Even though it'snot predictive, what's high risk tends to stay high risk. Fundsthat have historically provided good returns relative to theirlevels of risk give you an idea which funds might be worthinvesting in." Investors can get Morningstar fund updates inprint on a two-week cycle, or on CD-ROM with all fund ratingchanges updated monthly.

But Is It Fund Worthy?

Matthew Muehlbauer, research manager of The Value Line MutualFund Survey in New York City, contends that his company'sranking system is the most useful in helping investors find outwhat's investment-worthy and what isn't. Value LinePublishing Inc. provides two rankings: an overall rank that dividesfunds into three universes--equity, taxable fixed income andmunicipal fixed income--and a risk rank that divides funds intoequity and bond universes. The risk rank is calculated using thestandard deviation of the fund's returns for 36 months in afive-tier system. A ranking of "one" is the leastvolatile, "five," the most. Unlike Morningstar,Muehlbauer says that Value Line's service shows each fund'sdevelopments over the past 22 weeks, plus a methodical analysis ofthe fund's management and, in many cases, a recommendationdescribing what kind of investor should consider the fund."That way," Muehlbauer says, "you won't berecommending a highly volatile small-company fund to yourGreat-aunt Irma."

Get It Out Of The Vault

Whether you're a "do-it-yourselfer" or you preferto have help from outside sources when it comes to buying orselling a fund, knowing how fund services work is all for naught ifyou don't know which one is best. Mark Hulbert, editor ofThe Hulbert Financial Digest, which has been trackingMorningstar's performance since 1991, notes that as of December1997, Morningstar's top-ranked no-load equity funds have laggedthe stock market by an average of nearly three percentage pointsannually. Unfortunately, according to Hulbert, Value Linehasn't fared any better: Since 1994, when The HulbertFinancial Digest started tracking the service, Value Line'stop-ranked no-load general equity funds lagged the market by anaverage of nearly four percentage points per year, as of December1997.

But for every detractor of a particular ranking system,there's someone who supports it unconditionally. So what'sthe point?

Access to information on mutual fund performance is available inmany forms--it's not like all this information on funds is inthe vault or anything. I mean, you could sit around with yourfriends over coffee and probably come to your own conclusions. Whatrating services provide is a simple way for investors to sortthrough the immense number of available options to identify anumber of investments for further investigation. By understandingthe various methods used and their shortcomings, investors can makemore informed choices.

While some investors are stimulated by tomes of performancefigures, analyses of management styles, star ratings, risk analysisand other technical and not-so-technical sources of information,other people would rather leave it up to the experts. Financialadvisors can provide insight into which funds are most suitable fora particular investor and a specific situation. Even ifprofessional recommendations just help narrow the field, they cansave you time, effort and money.

Whichever way you choose to go, before your invest, get a copyof the prospectus of any fund you're considering and read it.Management style, fees, sales charges, investment policies and manyother important fund facts can be gleaned from this essentialdocument. If you combine this information with whichever types ofanalysis you prefer, and remember that past performance is not anindication of future returns, there's a good chance you'llincrease your ability to make the right choices.

Contact Sources

The Hulbert Financial Digest, (703) 683-5905,http://www.hulbertdigest.com

Morningstar Inc., (800) 735-0700, http://www.morningstar.net

Value Line Publishing Inc., (800) 833-0046, http://www.valueline.com