In Part 1 of this article, we looked at how to use the Morningstar Premium Fund Screener, and I showed you two screens I use to select top funds for my portfolio. This article will move on from the screening phase of the stock screening process to the analysis phase, where we actually choose the candidates for possible investment. The key to successful analysis is understanding how to read the results views provided by the screener. In addition to the basic views provided by Morningstar, the premium screener also allows you to create up to two additional views. By creating custom views that package your most important statistics together, decision making can be more rapid and accurate.
*NOTE: It is recommended that you have the Morningstar Premium Fund Screener open while reading this article. Visitors can sign up for a free trial at the Morningstar web site.
The Analysis Phase
Once I’m happy with the screen criteria I’m using, I then need to make some informed decisions about the funds that Morningstar returns. Which funds best fit into my portfolio? Which funds provide the best long-term pre- and post-tax returns? How well-managed are the funds? Because in-depth mutual fund analysis is time consuming, it’s best to narrow down your choice of funds as much as possible before taking a detailed look. By utilizing the built-in and custom views in the premium fund screener, the best candidates can quickly become evident.
Built-in Fund Screener Views
Morningstar provides five pre-built search results views; each view focusing on a different aspect of the returned funds.
This view provides a high-level overview of funds according to Morningstar data. While I like the idea of having a core set of statistics to provide a first glimpse at a fund, I’m a little concerned by this view’s focus on short-term results. I personally am looking for funds with long-term track records of success. Also, since this is my first look, I’d like to see a little more information to get a better-rounded picture, with data such as expense ratios, and portfolio roles. I ended up customizing this screen extensively, and it is discussed in-detail below.
Unfortunately, this screen provides annualized returns and category ranks on funds up to 5-years. While performance information is critical in making decisions about which funds to purchase, 5 years is not long enough for me to make smart, long-term decisions. Additionally, I am not overly concerned about fund performance ranks within a fund category. While I wouldn’t discount the importance of this rank statistic, I would prefer other statistics with the limited space available to me. This will be discussed further in the custom screens section below.
Risk & Tax Data View
I really like this screen, as it provides a solid selection of risk and tax statistics used to judge funds. Additionally, it provides a solid, long-term look at the tax-efficiency of each fund, up to 10 years.
This view looks at the makeup of each fund, such as where each fund belongs on the Morningstar Style Box, what each funds’ P/E ratio is, and what kind of turnover the fund has. Plus, this view also has stats for bond funds, such as credit rating, and duration. Overall, I like this screen and use it unmodified.
Nuts & Bolts View
More correctly labeled “Purchasing & Management,” this view contains statistics purchasing and loads, and how long each funds’ management has been at the helm. I don’t find this view particularly useful after building my custom screens, but I also think it can serve a useful purpose at the final stages of analysis.
After becoming familiar with and using the built-in screens, you’ll begin to get a feel for the information you find most useful, and how you’d most like information presented. That’s where the custom views come in. I’ve created two enhanced views of “Snapshot” and “Performance” that I use extensively when looking for new funds.
Enhanced Snapshot View
One of my biggest problems with the built-in snapshot view is its lack of long-term performance statistics and a broader overview of the fund type. My enhanced snapshot view includes more information about where the fund fits into my portfolio, how well the fund is managed, 10-year pre- and post-tax returns, and other key information.
- Morningstar Rating
- Morningstar Stewardship Grade
- Role in Portfolio
- Morningstar Category
- 10-Year Return (%)
- AfterTax Return (with sale) 10 yr (%)
- Total Assets ($ mil)
- Expense Ratio (%)
I feel the four included Morningstar statistics are very important when looking at any fund. When building my portfolio, I narrow down my fund choices to only those that fit into roles I want to add to my portfolio. For example, I may be looking for a Core International fund, or a Non-core Growth fund. What role I’m looking to fill will determine what kinds of funds I’ll look at, regardless of how high another fund may be growing each year.
Plus, the Stewardship Grade is a very influential factor in the funds I buy. Morningstar analysts grade funds based on in-depth research, and summarize that information into a letter grade that describes how well a fund is looking after your money. While Bs and As are all included in my analysis, Ds and Fs are excluded.
You’ll also notice I include 10-Year after-tax returns. Since I purchase funds outside of my retirement accounts, I am subjected to short-term and capital gains taxes. This measure shows me how much I would keep after taxes if I sold a fund. Because some funds are more tax efficient than others, I often find one fund with higher returns before taxes and another with a higher returns after taxes.
Enhanced Performance View
The built-in Performance view is too focused on short-term results for my liking. I want to look out 10 or 15 years to see how well funds perform over long amounts of time. This custom screen includes Annual Returns and AfterTax Returns (with sale) for 3, 5, 10, and 15 years and also includes the expense ratio. While the expense ratio is used frequently throughout these screens, I follow the commonly held wisdom that funds with lower expense ratios are taking better care of my money, and producing better returns over the long run.
Wrapping it Up
Getting good investment ideas involve the right tools to help you make the best decisions quickly. It’s important to understand the tools you’re using and maximize their capabilities so you can get the most out of them. The Morningstar Premium Fund screener provides built-in views for investors to analyze various aspects of funds quickly, and with customized screens each investor can tailor the screener to his own personal needs. If you are a fund investor, I encourage you to take some time to play around with the premium fund screener, so can find the best funds out there for your portfolio.