Flexibility's Power, Purity's Charms

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Flexibility's Power, Purity's Charms

Morningstar categorizes funds by narrow investment styles, such as large growth or small value. But the company doesn’t necessarily favor funds that stay in the same part of the style box year in and year out. In fact, while style-specific funds have their charms, flexible funds also have advantages. Neither one is better than the other. It’s up to you to decide how to use each in your portfolio.

The advantages

Peter Lynch isn’t the only fund-industry luminary who insists on having the freedom to pursue his best ideas, wherever they may lie. Others wouldn’t be half the managers they are if they couldn’t pluck any type of security from any corner of the world. And even with U.S. funds, some of the best managers are drifters who refuse to tether themselves to any one section of the Morningstar Style Box™.

The disadvantages

But flexible funds have their downside: they can make building a portfolio tricky. After all, if a fund is a small-cap fund one day and has large-company tendencies the next, how can investors be sure they’re really diversified? No wonder advisors, investors, and the media are wary of flexible funds.

The advantage of staying put

Style-specific funds, meanwhile, tend to cleave to one part of the style box. They always invest in, say, small-value stocks or mid-cap growth stocks. Some families offer funds that tend to stay put. As you can imagine, it’s much easier to build and monitor a portfolio of style-pure funds. If you select four funds that invest in different ways, you can have a reasonable expectation that they’ll continue to invest that way. Thus, you’ve positioned your portfolio to help ensure that you’re diversified.