Study Shows Mutual Funds Defy Truth
In Labeling Their Investment Objectives

The two major mutual fund tracking companies, Morningstar and Lipper, disagree nearly 23% of the time as to how to classify a fund's investment objectives (or style), according to an analysis performed by Investment News. Likewise, the two can't agree on a fund's market cap range for a given mutual fund.

The analysis is based upon an examination of 1,156 domestic funds, of which 264 were not in accord. For example, the two tracking companies can't agree as to whether Liberty Acorn is a small-cap growth (Morningstar) or a mid-cap core (Lippper). Likewise, is Meridian Value a small-cap blend of growth and value fund (Morningstar), or is it a mid-cap value fund (Lipper)?

The disparity is not academic for two major reasons: Advisers, who need to diversify client holdings, cannot rely upon this information. Second, advisers who want to compare their performance to an appropriate benchmark simply cannot assume that the benchmarks chosen will be the most accurate.

Consider two examples. How would one choose an appropriate benchmark for the CGM Focus Fund? It is neither a small-cap blend fund (Morningstar) nor a mid-cap value fund (Lipper). Instead, it employs a flexible approach and does not follow a particular investment style, according to the prospectus.

In terms of the diversification issue, why does GE Value Equity Fund (a large-cap value fund according to Morningstar) invest in so many high-flying growth companies such as Microsoft, Intel and IBM -- just to name a few of the many growth stocks that comprise its top 25 holdings. This fund is not an appropriate choice for diversification into value stocks. Do advisers know that?

Source: Investment News, March 11, 2002