I've been investing in mutual funds since sometime in the 1960s.  Over the years I've gradually developed a method for determining which funds should receive the bulk of my investments.  I initially gravitated to the Vanguard Group primarily because of their low cost structure, a reasonable initial minimum investment, the availability of life-of-fund calendar year performance data, and the ease of making exchanges between funds.

I'm primarily interested in consistency of performance over several years; not just in those funds which topped the rankings over the last month, quarter or year.  And I'm not impressed with those 1-year, 3-year and 5-year performance tables you see in so many ads.  Here's an example for two hypothetical funds:

Based simply on that information, which fund would you choose?  I suspect most people would pick fund A.  After all, its performance either equalled or beat that of fund B in all three time periods.  But suppose I showed you the performance of each fund for each individual calendar year:

Now which one would you pick?  Fund B looks a lot better now, doesn't it?  Its performance beat that of fund A in 4 of the 5 years.  Was the performance of fund A in 1999 just a fluke?  See how one year's results can skew a fund's apparent performance over a longer time period?  That's just one of the issues that led me to develop my own ranking system.

Without disclosing the full details of my system, I can give you a general idea of some of the factors contributing to each fund's final score:

1. The only data analyzed for any fund is its total return for full calendar years (also year-to-date through the latest completed quarter of the current year).  Total return includes price change plus reinvestment of all distributions.  No allowance for any taxes, purchase or redemption fees, account maintenance fees, etc., that might be payable by any shareholder is taken into account.

2. For any specific fund, the most recent year's performance is somewhat more important than the prior year's, which is somewhat more important than the year before that, etc.  Part of the reasoning is that as a fund grows in size, its manager(s) may have more difficulty maintaining above-average performance.

3. The weighting assigned to any given year is partially dependent on the number of funds for which performance data was available for that year (incomplete current year data has proportionately less weighting depending on the number of completed quarters).  This means, for example, that having the best performance out of 10 funds is not as important as having the best performance out of 20 funds.

The table below shows my rankings based on data through the end of the fourth quarter of 2010 (archived results are also available based on data through the end of calendar years 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008 and 2009).  If a fund was the best performer in every year it would receive the maximum score of 100, while one that was less than 5 years old would have little chance of achieving a score above 50.

Although I've only ranked stock funds from a small number of fund groups so far, I'll be happy to include any others that might be of interest.  However, for load funds, because of the potentially large front-end or back-end charges, I only plan to analyze "Class C" offerings, because this class is most closely comparable with no-load funds for single year performance.  Just fill out this form with the name(s) of the fund(s) you would like me to add, along with information on where I can acquire OFFICIAL life-of-fund (or at least the last 10 years if formed before 2001) calendar year performance (total return) data.

In fact, you may notice that the year listed as the First Calendar Year for some of the funds in the following table is later than the year after the fund's inception.  That's because most fund prospectuses only include total return data for each of the last 10 calendar years.  That's all the data I use if I can't get older information from the fund.  It's interesting to note that adding earlier information generally tends to increase a fund's overall score.

I feel it is important to mention that I do not just blindly invest all my assets in the top scoring fund or funds.  I also have a method for allocating my assets between money market, long-term bond and stock funds.  Within the stock category, it provides for diversification across market cap (large, medium, small) and investment style (growth, core, value) classifications.  It also provides a method for preventing gross overallocation in any one asset class, as well as transferring too much money to a class that is in a protracted decline.  For more information, look at my page on Asset Allocation and Diversification.

Fund Objective is primarily based on classifications by Lipper Inc., but I have combined and/or modified some categories:

• Equity Income (EI): Funds that seek high current income and growth of income.
• Global Stock (GL): Funds that invest in securities traded outside the U.S. and may own U.S. securities as well.
• International (IL): Funds that invest in non-U.S. companies.
• Large-Cap Core (LC): Funds that invest in large companies, with latitude in the type of shares they buy. This category also includes funds that are designed to replicate the performance of the Standard & Poor's 500 index on a reinvested basis.
• Large-Cap Growth (LG): Funds that invest in large companies with long-term earnings expected to grow significantly faster than those of companies in major indexes.
• Large-Cap Value (LV): Funds that invest in large companies considered undervalued relative to major indexes based on price-to-earnings ratios, price-to-book ratios and earnings growth.
• Midcap Core (MC): Funds that invest in midsize companies, with latitude in the type of shares they buy.
• Midcap Growth (MG): Funds that invest in midsize companies with long-term earnings expected to grow significantly faster than those of companies in major indexes.
• Midcap Value (MV): Funds that invest in midsize companies considered undervalued relative to major indexes based on price-to-earnings ratios, price-to-book ratios and earnings growth.
• Multicap Core (XC): Funds that invest in companies of various size, with latitude in the type of shares they buy.
• Multicap Growth (XG): Funds that invest in companies of various size with long-term earnings expected to grow significantly faster than those of companies in major indexes.
• Multicap Value (XV): Funds that invest in companies of various size considered undervalued relative to major indexes based on price-to-earnings ratios, price-to-book ratios and earnings growth.
• Sector (SE): Funds that invest in companies restricted to specific sectors such as: gold, health, biotech, natural resources, technology, etc.
• Small-Cap Core (SC): Funds that invest in small companies, with latitude in the type of shares they buy.
• Small-Cap Growth (SG): Funds that invest in small companies with long-term earnings expected to grow significantly faster than those of companies in major indexes.
• Small-Cap Value (SV): Funds that invest in small companies considered undervalued relative to major indexes based on price-to-earnings ratios, price-to-book ratios and earnings growth.

Last revised: January 23, 2011