Chuck Jaffe at MarketWatch has a great piece that I thought I’d share for my (semi) weekly Mutual Fund Monday post this week.

His article lists 7 ways that fund companies manipulate their stats to trick investors. It’s all quite legal, since much of it depends on your the viewpoint and perspective applied to the facts and figures. For example, how far back do those “past performance” figures go? A fund may look great only because it has an explosive couple of years at the beginning of the period, and has been lack luster since.

Anyway, here’s a list of the ways but Chuck does a good job of explaining each in greater detail in the original article.

1. Past performance, Part I
2. Past performance, Part II
3. Past performance, Part III
4. Average Cost
5. Returns aren’t adjusted for taxes
6. Time-weighted performance measurement
7. Manager tenure

You will have noticed, no doubt, that the 1st three items on the list have a common theme. That’s because even though most investors know that “past performance is no guarantee of future results”, it’s still the single characteristic that carries the most weight with investors. Mutual fund companies know that, and they use it. A lot.

Here’s Chuck Jaffe, in his own words.

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These are peculiar times we find ourselves in. Here’s a list of funds from Kiplinger that not only cover just about every bogeyman bandied about in the financial press these days, but hit upon some classic needs in a mutual fund as well.

Inflation protection

Sooner or later, the reckless monetary policy in Washington D.C. is going to catch up with us, and it will likely result in much higher inflation than we’ve seen in recent times. To combat that threat to your wealth, you may want to look into Fidelity Strategic Real Return (FSRRX). This fund holds a mix of 30% inflation indexed government bonds, 25% commodities, 20% real estate, and 25% floating rate loans. Diversification should provide for a smoother ride, and each asset type benefits from rising prices.

Net Asset Value (NAV):8.40
Yield: 2.58%
YTD Return: 22.12%
5y Avg Return: N/A
Rank in Category (ytd): 122
% Rank in Category (ytd): 18.86%
Beta (3y): 0.88
Morningstar Risk Rating: Above average

Benefit from a recovery

Eventually, the economy is bound to recover, and when it does you’ll want to be in the T. Rowe Price Mid-Cap Growth (RPMGX), or so the staff at Kiplinger say. The manager of this fund focuses on fast growing companies, with high returns on investment capital. Small and mid-cap stocks typically lead out of a recession anyway, so this seems like a good choice for a recovery fund. It’s a bit expensive however, with an NAV of 46.06.

NAV:46.06
yield: N/A
YTD Return: 38.69%
5y Avg Return: 6.27%
Rank in Category (ytd): 204
% Rank in Category (ytd): 23.94%
Beta (3y): 1.11
Morningstar Risk Rating: Average

Benefit from the falling dollar.

The Merk Hard Currency Inv (MERKX) fund seeks to profit form a declining dollar by investing in gold and money market securities, denominated in foreign currencies. The fund does not appear to have a Morningstar rating, and the ratio of investments in currency to gold is not readily apparent, so be sure to read the prospectus on this one carefully before you invest.

NAV:12.41
yield: N/A
YTD Return: 12.69%
5y Avg Return: N/A
Rank in Category (ytd): 0
% Rank in Category (ytd): 0%
Beta (3y): -0.70
Morningstar Risk Rating: None.

Best new fund.

Kiplinger’s pick for best new fund is the Third Avenue Focused Credit Investor (TFCVX) fund. Their reason seems to be that the fund sponsor, Third Avenue, seldom launches new funds so it must be good! I’m not sure that’s enough for me to invest in a fund, but it does seem interesting enough to examine further.

Third Avenue Focused Credit Investor focuses on junk debt, specifically convertible bonds and distressed securities. Need I say that these are risky investments? Still, much of the risk may be wrung out of them since the toxic asset debacle of 2008. You’ll have to do your own gut check on this one, as well as your own research because there isn’t a lot of information or history out there for this fund yet.

Low minimum required investment.

Most mutual funds require minimum investment amounts that put the fund out of reach for the small investor, especially one just starting out. But some funds pride themselves on keeping a low minimum. Kiplinger rates their best low minimum fund pick for 2009 to be the same as last year: Amana Trust Growth (AMAGX) fund. The minimum investment is $250, and the fund focuses on large cap growth companies. While the managers choose their investments using Muslim principles as a guide, the fund is open to all investors.

It’s interesting to not that Morningstar gives this fund a below average rating. Keep in mind that the average here is among all large cap growth funds, not just low minimum funds.

NAV: 20.66
yield: N/A
YTD Return: 22.28%
5y Avg Return: 8.93%
Rank in Category (ytd): 1280
% Rank in Category (ytd): 70.95%
Beta (3y): 0.75
Morningstar Risk Rating: Below average

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High-yield bonds.

T. Rowe Price Spectrum Income (RPSIX)

This is a fund of funds. The management team invests in up to 9 T. Rowe Price funds in order to get exposure to all of the sectors of the bond market. The fund took a 14.7% hit in 2008, due to the high yield aspect, but it’s up 6.3% for the year ending May 29.

Intermediate-term bonds.

Metropolitan West Total Return Bond (MWTRX)

The management team of Stephen Kane, Laird Landmann, and Tad Rivelle have been at the helm of this fund since 1997, and with excellent results. The team focus on a selective group of bonds including BB and B rated, higher yielding issues and bank loans. However, they also placed a contrarian bet on commercial and residential mortgages in 2008, so this fund is not for the impatient or conservative investor.

FPA New Income (FPNIX)

Here’s a more conservative fund. Manager Bob Rodriguez has maintained a “buyer’s strike” against high-yield bonds and U.S. Treasuries, and has a sterling long-term record. One item of note however: Rodriguez plans to take a one year sabbatical starting January 2010, but he is passing control of the fund to Thomas Atteberry, the fund’s co-manager.

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