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Morningstar Executive Says Fund Risk Outlasts Fund Returns

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NU Online News Service, Oct. 14, 2003, 4:47 p.m. EDT – Daredevil mutual funds stay aggressive, and conservative funds stay careful, according to John Rekenthaler, president of Morningstar Associates L.L.C., Chicago.

Analysts at Morningstar Associates, the investment advisory arm of Morningstar Inc., recently used data from 1988 to 1993 to study fluctuations in fund returns and risk levels.

The results: “performance may not persist, but risk does,” Rekenthaler said today during a retirement plan services teleconference organized by New York Life Investment Management L.L.C., Parsippany, N.J., a unit of New York Life Insurance Company, New York.

Morningstar research also supports the belief that specialized mutual funds tend to soar the highest and fall the quickest.

“I would be very wary about having funds of a specialized nature in my fund menu,” Rekenthaler said.

Rekenthaler cited results of another study that bolsters the argument that diversifying fund portfolios reduces a 401(k) plan participant’s level of risk. The study shows that investing in four to eight funds is much safer than investing in just one or two funds, and that investing in more than eight funds provides little or no noticeable reduction in risk, Rekenthaler said.

In the real world, “we know participants don’t own many funds,” Rekenthaler said. “And we know participants pay too much attention to returns and too little to risk.”

Rekenthaler recommended that employers use 401(k) plan enrollment forms to steer plan members toward investing in a truly diversified selection of funds.