I’ve spent a lot of time in the past week working with the Morningstar Premium Fund Screener, a tool used to search for mutual funds based on filtering criteria. Think of a screener as both a search engine and a pair of blinders. Not only will it help you discover new funds but it will also keep you away from funds that may post high short-term results but have a lot of inherent risks.

This screener is the best I’ve seen for mutual funds and in addition to access to Morningstar analyst reports, makes the Morningstar Premium subscription worth every penny of the $135/yr fee. If you can get a friend or two to split it with you, all the better! Think of it this way, if you have $15,000 invested in mutual funds and this subscription lets you pick up an extra 1% annually, it has more than paid for itself.


My Screens

After playing with the pre-built Morningstar screens, I’ve built a few of my own. I think they are built on a solid theoretical foundation and will help us newbies select solid long-term investments. They are presented now for your use.

Screen #1: Minimum Requirements

This screen helps me find all stock and bond funds that meet my basic requirements. After I like my minimum requirements screen, I then use it as a foundation for all my other screens.

Criteria:

  • Fund Manager Tenure >= 3 OR Index Funds = Yes
    I want a fund manager who has been working on the fund at least 3 years. This reduces the risks that are generated when a fund switches managers. On the other hand, if the fund is a passively managed index fund, then I don’t care how long the fund manager has been on the job.
  • Expense Ratio < = Category Average
    Because a fund’s expense ratio is one of the greatest predictors of long-term returns, there is no reason I should be paying more than the category average in expenses.
  • Minimum Initial Purchase < = 5000 AND Closed to New Investment = No
    If I can’t buy it, then I don’t want to see it.
  • Fund Size (Total Assets in $MM) >= Category Average
    I want to invest in a fund that has a fair amount of assets already, so I want to filter out the smallest funds.
  • Morningstar Stewardship Grade >= B OR Morningstar Stewardship Grade = Not Available
    The Morningstar Stewardship Grade is available to Premium Members and grades a fund based on five criteria:

    • Regulatory Issues
    • Board Quality
    • Manager Incentives
    • Fees
    • Corporate Culture

    I’ve researched a number of these ratings, and it seems to me that their ratings are fair and in-depth. With over 3000 funds rated, I want to select only those that have a solid corporate rating. I’ve also included other funds that haven’t been rated yet, because this criteria has been around for less than 2 years. For more information about the Stewardship Grade, click here.

  • Morningstar Analysis Available = Available
    With almost 6000 funds reviewed by Morningstar Analysts, I want only those funds that are backed by analyst reports.

Grand Total: 644 funds

Amazingly these basic criteria narrow down almost 20,000 funds to less than 750 — and we haven’t even looked at performance yet!

Screen #2: Long-term Stock Performers

This screen shows me only stock funds with consistent track records of beating the S&P 500. I only want to see funds that have been around for 10 years, and I don’t want to see specialty funds such as those in Technology or Energy because they aren’t inherently diversified and I don’t have enough money to spread over 30 different funds. My goal here is to select 3 or 4 solid long-term funds that will provide consistent year-over-year growth.

Criteria

  • Minimum Requirements Screen
    I include all the criteria from my minimum requirements screen to weed out those that don’t meet my basic requirements right away.
  • Fund Category = Domestic Stock (ex-specialty) OR Fund Category = International Stock OR Fund Category = Hybrid
    These fund categories include Domestic Stock funds, International Stock funds, and Balanced Funds. I purposely excluded Specialty funds such as Energy or Technology because they aren’t diversified across sectors, and I only want long terms performers with balanced sector allocation.
  • 5 Year Return >= Standard & Poors 500
    AND 10 Year Return >= Standard & Poors 500
    AND (15 Year Return >= Standard & Poors 500 OR 15 Year Return = Not Available)

    I want funds that are at least 10 years old and beat the S&P 500 for 5 years annually or more. If the fund is 15 years old+ then it should also beat the S&P 500 over a 15 year period. If my funds can’t consistently beat the S&P 500, then I might as well just own an index fund!

    I don’t care about returns less than 5 years because I figure every fund will have a few bad years, and I don’t want to penalize them. Also, periods less than 3 years seem to have lower correlation to the S&P then is appropriate for a screen. I don’t want to weed out too many funds, after all.

Grand Total: 78 funds

Wrapping it up

After using my screens I can narrow my fund choices down to 100 or less, and then the real work of sifting through each fund begins. Morningstar’s excellent Premium Stock Screener makes the cost of the subscription well worth the price. Using the screener in conjunction with a little intuition can quickly narrow down the funds that have what it take to make it into the intelligent investor’s portfolio. In Part 2 of this article, I will talk about the analysis phase in-depth, and describe how to customize the screen results to find the perfect funds quickly.

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