Andy

To the person who recommends looking for funds with bad performance: past successes don’t mean there will be future successes, but past failures are an even worse indicator – especially with the recent gains. What you want are funds managed by people who have had past successes, but are well-priced now.

A good example of a successful fund is given in the book Unconventional Success: the fund in question has a 10-year record of beating the S&P 500 by 4% with the same managers, but has slow years; in particular, the book mentions a lot of investors leaving it when it underperformed the internet bubble (earning a poor Morningstar rating). It’s also closed to new investments on and off, since there’s only so companies that meet the managers’ criteria. In addition, the managers and many employees of the management company (as well as their families) invest in the fund – so good performance is more than a way to gain assets and fees. It has reduced the expense ratio in the past. You’ve thought of some of these requirements, but if it’s possible to add more factors to the morningstart search it might help refine the list.

In the mutual fund world it can be hard to figure out who’s really trying to give investors bigger returns without additional risk and who’s just trying to track an index and collect fees for “picking the right stocks”. I hadn’t thought of using a method like this to find the few truly superior funds, but it’s an interesting idea.

If you do find a good fund, it might have slow years when a regular index is doing well, so balancing it with other assets could still help.