5 screening criteria for mutual funds

When one starts to screen mutual funds for investing, the following 5 must be set before any additional criterion is applied to the screen.

1. Set front load = 0. Yes, this should be the first selection criterion. There is no need to throw your mutual fund investment in a hole to begin with outrageous 5% or more front loads. This should remove all class A shares from your result set.
2. Set deferred Sales Charge = 0. When your pie grows, keep it entirely. Do not give up part of it in the sales charges when you sell. This takes care of the class B shares from the result set.
3. Say no to 12b-1 fees. 12b-1 fees include the charges of marketing and selling the mutual fund. There is no need to pay the marketing fees for the fund family. If the fund is good, people will find it. If you believe in efficient market theory then you have to believe that no good fund goes unnoticed. The new assets will surely flood the better performing fund. Removing 12b-1 fee funds from the selection should remove all class C shares from the result set.
4. Keep expense ratio less than 1.25%. Although industry average expense ratio of the mutual funds is around 1.46%, I suggest you keep it less than 1.25%.
5. Find funds with lower turnover. The mutual funds with higher churn rates have higher capital gains taxes that must be paid to government in taxes each year. This reduces the overall return of the fund.

After applying these 5 criterions, go ahead and add others as you may. This should be a good standard starting point. There is no magic formula out there for finding great mutual funds. We don’t know right now which mutual funds will perform better from here in out. But, I believe these screening criterias will remove some definite bottom feeders from your list.

All disclaimers apply.

S&P 500 Dividends

The table below lists the total dividend payments to the shareholders of the S&P 500 companies from the year 1988 to 2004. As you can see, in 1988 the S&P 500 companies collectively paid out $67.36 billions in dividends. This dividend amount rose to $181.02 billion in 2004. I also calculated the growth rates of dividends from year to year in the third column of the table.

Year	Dividend (Billions)	Dividend Growth Rate
1988	$67.35	-
1989	$74.13	10.05%
1990	$80.47	8.55%
1991	$81.88	1.75%
1992	$85.18	4.02%
1993	$88.12	3.44%
1994	$95.21	8.04%
1995	$101.69	6.81%
1996	$112.62	10.74%
1997	$119.51	6.11%
1998	$128.84	7.80%
1999	$137.53	6.74%
2000	$141.08	2.58%
2001	$142.21	0.80%
2002	$147.81	3.93%
2003	$160.64	8.68%
2004	$181.01	12.67%
Average Dividend Growth Rate		6.24%

From the growth column numbers you can see that the dividends have always increased year over year. The year over year dividend payments have not gone down in spite of 2000 bubble burst, corporate scandals, or recent wars. The average growth rate of the dividends has been 6.24% since 1988.

Doing calculations with price in denominator or numerator is very tricky. The price/earnings, price/book-value, price/dividends, and even the dividend yield can swing wildly with volatility in price. But, when we remove the price from the equation and look at raw dividend numbers, the noise (volatility) is almost always gone from the numbers and we are left with smooth ride. The key here is to learn to disregard the volatility of price when we invest our money, the long-term investors should benefit greatly from it.

Below is the chart of the above data.

20 Largest Mutual Funds

The table below lists the 20 largest mutual funds. These funds manage close to $1 trillion in assets among them.

American funds make up almost half of the largest 20 funds. A total of 9 American fund family funds make the list. The Fidelity funds occupy 5 spots in the top 20 funds. The Vanguard fund family adds 4 funds to this list. The Dodge & Cox and Pimco each add one fund to the list.

The Pimco total return fund is the only bond fund. The Fidelity Low priced stock is the only fund, which hold mainly small cap stocks; most of the funds hold large cap stocks in the portfolio.

All American family funds are load funds. The remaining 11 funds are no load funds. The Pimco Total Return (PTTRX) is the institutional class fund, that’s why it is listed as a no load fund. The investor class fund of the Pimco Total Return (PTTAX) is a load fund, but it does not make this list.

Symbol	Fund Name	Total Net Assets (Billions)	10-year Annualized Return	5-year Annualized Return	3-year Annualized Return
VFINX	Vanguard 500 Index	70.8	9.41%	0.76%	12.48%
AGTHX	American Funds Grth Fund of Amer A	67.7	12.76%	3.27%	15.99%
AIVSX	American Funds Invmt Co of Amer A	66.0	11.13%	4.64%	12.59%
AWSHX	American Funds Washington Mutual A	63.1	10.76%	5.74%	11.76%
FCNTX	Fidelity Contrafund	55.6	11.77%	6.98%	19.66%
PTTRX	PIMCO Total Return Instl	52.7	7.43%	6.85%	4.79%
FMAGX	Fidelity Magellan	52.4	6.85%	-0.68%	10.16%
AMECX	American Funds Inc Fund of Amer A	47.4	10.22%	9.43%	13.59%
DODGX	Dodge & Cox Stock	46.3	14.67%	12.57%	18.24%
CAIBX	American Funds Capital Inc Bldr A	41.2	11.3%	10.82%	14.64%
AEPGX	American Funds EuroPacific Gr A	40.3	10.34%	7.07%	22.06%
VINIX	Vanguard Institutional Index	39.3	9.55%	0.89%	12.61%
FLPSX	Fidelity Low-Priced Stock	37.1	16.11%	18.57%	21.28%
CWGIX	American Funds Capital World G/I A	35.6	13.57%	11.26%	22.1%
VFIAX	Vanguard 500 Index Adm	35.5	-	0.84%	12.57%
ANWPX	American Funds New Perspective A	34.6	11.33%	6.13%	17.82%
ABALX	American Funds American Balanced A	32.4	10.21%	8.23%	10.55%
FGRIX	Fidelity Growth & Income	31.2	8.62%	0.52%	9.83%
FDIVX	Fidelity Diversified International	30.2	12.73%	9.54%	23.91%
VWNFX	Vanguard Windsor II	29.2	11.43%	7.28%	17.09%

Datasource: © Morningstar, Inc.