2 tools for a mutual fund portfolio checkup

Summer and the end of the year are popular times for investors to perform checkups of their mutual fund portfolios to see whether they're on track with their savings goals. At least once a year you should assess whether the mix of stocks, bonds and any alternative investments reflects an appropriate risk level for this stage of your life. Many investors have multiple investment accounts -- 401(k)s, IRAs, brokerage accounts and the like -- so it's not always easy to get a big-picture view of where you stand. One special consideration for bond investors now is how vulnerable they are to rising interest rates. Here are a couple of tools that may help: 1. Look inside your portfolio: Fund tracker Morningstar offers an "Instant X-Ray" tool to provide a snapshot of all your holdings. It reveals the overall mix of stocks versus bonds, and how you're invested within each asset category. It's available on Morningstar's website, under the "Tools" tab. Enter ticker symbols for mutual funds and stocks, and current dollar values for each holding. Check your recent account statements for the latest figures. Instant X-Ray will break down what you've got across all of your accounts. It's helpful for determining whether you're close to the targets in your long-term plan. Within each asset category, you can get detailed breakdowns, such as how much you've got in growth stocks compared with value stocks, or large-caps versus small. You can compare those figures to the composition of stock indexes to check whether you may be over- or underexposed to one segment of the market. For example, large-cap value stocks make up 37 percent of the Russell 5000 index. If you're significantly above or below that level, an adjustment may be in order. You can do the same with stock holdings categorized by sector of the economy, such as energy, or real estate. An "Interpreter" tab offers written commentary on how your investments stack up, and your risk level. The tool also helps compare your bond holdings against the broader market. Instant X-Ray can also help combat overlap in a fund portfolio. Perhaps you're unaware that two of the mutual funds you invest in happen to count the same stock among their top 10 holdings. The "Intersection" tab will help uncover any such instances. You may want to reconsider keeping both funds, if you're worried you've got too much riding on a single stock. Note: Instant X-Ray is available for free. But certain features are limited to Morningstar users who register for free, purchase a premium membership for $185 per year, or sign up for a free 14-day trial. 2. Gauge your interest rate risk: Bond investors face substantial risk now from the certainty that short-term interest rates will eventually rise. They're currently near zero, in part because of the Federal Reserve's stimulus policies to help spark the economic recovery. But the Fed continues to signal that it will raise rates if inflation becomes a serious threat. When interest rates exceed the rate on a previously issued bond, that bond's value on the open market drops. Such price declines can lead to losses for investors in bond mutual funds, if the price drop is big enough to offset the bond's yield. One method for assessing a bond fund's vulnerability is to estimate how much an investor could lose over 12 months if yields for Treasury bonds rise 1 percentage point in response to an interest rate increase. To make that estimate, go to the fund's website to look up the fund's latest SEC yield. It's a number that approximates the yield of the fund's bond holdings at a snapshot in time. (Funds often publish other yield figures, such as distribution yields and 12-month trailing yields, which aren't as useful for gauging rate risk as the SEC Yield). Once you've got the number, subtract it from the fund's current duration, a figure that's also published on fund websites. For example, the world's largest bond fund, Pimco Total Return, has a current SEC yield of 2.1 percent, with an average duration of 3.6 years. That means if yields increase 1 percentage point over 12 months, the fund could lose about 1.5 percent during that span. Using that calculation, some funds specializing in long-term bonds could lose as much as 9 percent. Published: Mon, Jul 18, 2011