How To Determine Mutual Fund Holdings With Morningstar

Morningstar is one of the best mutual fund research tools out there for small investors and is pretty much the only tool I use.  If you don’t already have a free Morningstar account, I highly recommend you sign up for one.  Today I’ll give an overview of how to determine the mutual fund holdings of a fund you may be considering.  While this is less important with index funds, it is an absolutely essential step when researching actively-managed funds.  Morningstar is best known for their mutual fund ratings, but I find their portfolio information far more useful.

For the purposes of this example, I’ll be using Third Avenue Value (TVFVX).  Click here to visit Third Avenue Value’s Morningstar page.  Morningstar has been known to change its layout from time-to-time, but the following descriptions are accurate as of this article’s publication date.

Determining Mutual Fund Holdings With The Portfolio Tab

Once you’ve pulled up a particular mutual fund’s page on Morningstar, you should see a tab labeled “Portfolio” towards the top of the page.  Click on it to bring up a page containing the following information:

Style Box Details

Here Morningstar lists how the fund falls into the Morningstar Style Box.  There is a world of difference between a large-cap value fund and a small-cap growth fund, and this box will tell you at a glance what you can probably expect going forward, in most cases.  Beside the actual style box, Morningstar provides a breakdown of the fund’s Average Market Cap as well as the percentage of the portfolio invested in Giant-, Large-, Medium-, Small-, and Micro-cap stocks.  While a large-cap fund will obviously be dominated by the returns of large-cap stocks, whether the fund holds 0% or 10% of its assets in small-cap stocks will obviously play a role in determining future returns, however small.

Of particular interest in this section is the Investment Style History summary, which gives the fund’s style box for each of the last three calendar years.  Since style drift is a definite concern with most actively-managed funds, checking up on a fund’s style history will give somewhat of an indication of whether or not its manager sticks to his strategy in good times and bad or switches investment strategies depending on market conditions (an unwise move).

The Valuation And Growth Rates section tells you whether or not a fund currently hold’s expensive or inexpensive stocks relative to their earnings, book value, sales, and cash flow.

Asset Allocation

This is probably the most important piece of information on the page (followed closely by the style box) because asset allocation determines the large majority of a fund’s future returns.  Indeed, asset allocation is far more important than stock picking abilities in that regard.

This section will tell you what percentage of the fund’s portfolio is invested in stocks, bonds, cash, and alternative assets as well as the fund’s allocation to foreign stocks.  As you can see, TVFVX currently invests just over 70% of its assets abroad, meaning its returns will have more in common than the EAFE international index than the S&P 500.  That little nugget right there will put you ahead of 80% of the competition.  For balanced mutual funds, this is where you’ll find out the fund’s stock/bond split.

Sector Weightings

Most actively-managed funds try to maintain something close to the market weight when allocating amongst the various market sectors.  That said, many funds aren’t shy to go against the grain.  If your mutual fund was investing heavily in the real estate and financial sectors back in 2007, that’s something it would have been nice to know.

International Exposure

This isn’t something I pay a lot of attention to, to be honest.  Morningstar gives you a breakdown of the percentage of a fund’s assets invested in different regions and countries of the world.  As you can see, Hong Kong accounts for about 45% of TVFVX’s assets while the United States accounts for only 19%.  If Hong Kong experiences a recession, this fund stands to get hammered.

Sign up for a free Morningstar account today for access to more useful portfolio tools.