What is a mutual fund. A mutual fund is a professionally managed portfolio of assets. Assets can include a number of different items including stocks, options, bonds, real estate and more.
1. Keep it cheap. All funds charge an annual fee called an expense ratio. But some funds charge more than others. Interestingly, there’s zero correlation between the size of the expense ratio and the degree of market outperformance. For example, AIM Charter B (BCHTX) charges 2.01% annually but has lost to the market over the past five years. CGM Focus (CGMFX), by contrast, charges just 1.02% but, thanks to top holdings like MEMC Electronic Materials (NYSE: WFR) and Las Vegas Sands (NYSE: LVS), has walloped the S&P by more than eight percentage points per year since 2002.
2. Say no to loads. You don’t need sales charges, known as loads, either. Once again I refer you to AIM Charter B. Its positions in Coca-Cola (NYSE: KO) and ExxonMobil are easily duplicated by cheapskate market-beater Fidelity Contrafund (FCNTX).
3. Cut the fat. More insidious are funds that are no longer accepting new money but still charge a 12b-1 fee to cover marketing expenses. MainStay Equity Index (MCSEX), which has large positions in Pfizer (NYSE: PFE) and Altria (NYSE: MO), is a prime example. It charges 0.25% annually for promoting a fund you can’t buy and which, after expenses, has narrowly lost to the market since 2002.
The Warren Buffett Mutual Fund
The good news is that you can get more affordable access to Buffett and his collection of subsidiaries and equity holdings — a lineup that included ConocoPhillips (NYSE: COP), Anheuser-Busch (NYSE: BUD), and Procter & Gamble (NYSE: PG) at the close of 2006 — for smaller sums. How so? Via mutual funds that hold Berkshire shares in their portfolios.
Ariel Focus (ARFFX), for example, recently had 7.6% of its assets plunked down on Berkshire B shares. The fund rounds out its portfolio with the likes of H&R Block (NYSE: HRB) and Citigroup. Oak Value (OAKVX), meanwhile, runs with a Berkshire slug that weighs in at more than 9% of assets and, if you invest via an IRA, has a $1,000 minimum. Buy shares of this puppy, and in addition to Berkshire, you’ll be investing in a portfolio that recently held 3M (NYSE: MMM) and eBay (Nasdaq: EBAY), too.
What’s that? Those funds don’t provide quite enough Buffett for you? Not to worry: In Motley Fool Champion Funds, we’ve recommended a fund — my favorite of the Buffett boys — that packs more than 16% of its assets into Berkshire Hathaway. And this fund, too, can be had (via an IRA) for a mere $1,000.
In the interest of protecting value for our members, we tend to keep our newsletter’s recommendations close to the vest. But if you want the inside scoop on this pick and all of our others, no problem. Just click here for a free 30-day guest pass.
Fund your future
In the meantime, add “access” to the list of winning traits that make investing in a world-class portfolio of mutual funds a great way to begin — and continue — your career as an investor. In addition to the likes of Berkshire, funds also open the door to areas of the market that might lie outside your circle of investing competence.
If you’re looking to dial up your exposure to, say, equities plucked from the world’s developing economies, or even industries in your own backyard that you may not fully understand — biotech and nanotech come to mind — terrific funds led by stock pickers who do understand them can be had, provided you know where (and how) to look.
Pricey picks with rookie managers should be avoided, for example, as should most funds that pack tons of assets into narrow areas of the market. Quick and easy diversification is another built-in advantage of well-chosen mutual funds.