Rational Investing: Watch details of mutual funds when investing

"I have always had good luck owning stock in companies that have names that start with H.' Got any good ideas for H' stocks?"

When I am out of town visiting clients or on a research trip, I generally make myself available in that area as a speaker for civic organizations. It is always fun meeting new people and discussing the state of the economy and the markets.

The question and answer period is my favorite part of the program. While I normally get fairly routine questions, there have been times when I have been hit with doozies like the "H" stock question.

Once a woman asked what companies issued blue stock certificates her favorite color.

Another person asked if I thought "they" (the government?) should make available for day traders a program that would help some of them deal with their addiction.

Many of the questions at my most recent presentation had to do with mutual funds.

Several people asked what could be done about the much higher than normal short-term gains their mutual funds had generated in 1999.

Obviously, nothing can be done this year to mitigate last year's tax liability. (Maybe that question was more for venting than for seeking an answer.)

At least the question brought up some animated discussion about the changes that have taken place in recent years in the operations of many mutual funds.

Here are some of the concerns expressed by mutual fund investors.

Style change

We have seen a significant number of mutual funds that have gone outside their stated style in a chase for performance. Some funds that profess to be long-term conservative or value oriented or prudent have been very aggressive in an effort to look good for quarter-by-quarter performance measurement.

Window dressing

Funds are only required to report their holdings to shareholders twice a year. In order to show that they hold the stocks that have done well, some funds will acquire such issues just in time to have them show up in the report to shareholders. Some then sell them shortly after the report is filed.

How would you know that from your reports? You wouldn't.

High portfolio turnover

This happens as a result of trying to capture profits in a volatile market. It increases the transaction costs of the fund and all too often creates short-term capital gains that are taxed at the individual taxpayer's highest rate.

Duplication of holdings

There are a lot of fund families that offer funds with different stated styles, and should therefore each hold different types of investments.

Guess what? We have seen funds from the same family that are labeled Growth & Income, Income, Balanced, Growth, and Aggressive Growth that held many of the same issues (mostly high valuation growth stocks) among their top 20 holdings.

Does that make sense? If you want a conservative portfolio should it hold issues that sell at price-earnings ratios of 60, 70, or even 100?

If you have similar concerns about your mutual funds, talk with your financial professional.

He or she should be happy to provide an analysis of the funds you own. With literally thousands of funds available, you should be comfortable with those you own.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Questions or comments can be directed to him by mail via The Springfield Business Journal, 313 Park Central West, 65806 or by e-mail at clark@slia.com.)