Underrated, Overrated Mutual Fund Statistics

Both mutual funds and baseball generate reams of statistics. With the baseball season about to begin, let’s take a closer look at which statistics and factors in both fields may help you pick winners and which ones are mostly noise.

Following are three underrated and three overrated statistics in both baseball and mutual fund investing.

Underrated: Mutual-fund expense ratios and on-base plus slugging (OPS)

A mutual fund’s expense ratio is the single best predictor of its future returns. The lower the expenses, the more likely a fund is to outperform.

Why would anyone invest in a fund with a 5% load or a 2% expense ratio when there are low-cost, quality funds available in virtually every asset class? The expense ratio should be the first thing to consider when evaluating a mutual fund.

Similarly, OPS is a much more useful measure of batting prowess than batting average, home runs or RBIs. By adding on-base percentage and slugging percentage, you can measure a player’s ability to both get on base and hit for power in one handy number.

Overrated: Mutual-fund past performance and high-school baseball players

Make sure to look at a fund’s dollar-weighted returns, which reflect the returns its investors actually achieved.

For example, a tiny fund can have a great year, be showered with cash from its investors, and then have a string of bad years. Be wary of “one-year wonders,” even if the one year was a blowout.

Similarly, college baseball players have longer, more meaningful track records than those coming straight out of high school.

Underrated: Mutual-fund diversification and drawing walks

The more diversified a mutual fund is — whether by industry, region, size, etc. — the lower its likely risk, which can lead to higher long-term returns. In baseball, the unglamorous walk is a powerful weapon because it gets runners on base, and the odds of scoring improve with each walk.

Overrated: Morningstar ratings and good-looking players

Some investors see that a mutual fund has a five-star Morningstar rating, and that’s where their analysis ends. But don’t assume the winners of Morningstar’s beauty contest are world beaters.

Similarly, baseball general managers often prefer handsome, athletic-looking players when those with less appeal often outperform and cost a lot less too. Some funds that don’t have a top Morningstar rating are great bets for superior future performance.

Underrated: Mutual-fund 2008 performance and pitcher strikeouts

In 2008, some funds didn’t keep an eye on risk controls and did irreparable damage to their investors. Beginning next year, the five-year performance of mutual funds will no longer include 2008. For any actively managed fund you’re considering, look at how it did during that crisis.

Similarly, sometimes pitchers need a strikeout. The ability to strike out batters consistently can help a pitcher avoid dramatic blowups.

Overrated: Mutual fund manager tenure and stolen bases

While both of these metrics can be valuable, they’re often overrated. A fund may have had the same manager for decades, but is he or she really the brains of the operation? Sometimes star managers focus more on selling their fund to investors than on picking the actual investments. In baseball, a stolen base is exciting and has value, but the risk of being thrown out on the base paths can outweigh its benefit.

Paul Jacobs, CFP, is chief investment officer of Palisades Hudson Financial Group, a fee-only financial planning firm and investment advisor with offices in Scarsdale, N.Y., Atlanta; Fort Lauderdale, Fla; and Portland, Ore. He is based in the Atlanta office and can be reached at paul@palisadeshudson.com.