Aug. 10–Morningstar, a well-known and widely quoted information company, is packed with bright young people who earn their daily bread analyzing mutual funds.

Their information and insights are followed by hundreds of thousands of investors and money managers.

It’s worth watching when the analysts select — from a universe of more than 11,000 mutual funds — the ones where they will invest their own daily bread.

Morningstar’s 401(k) retirement plan offers 17 choices to the Chicago company’s several hundred employees. That array changed not too long ago, when the investment committee tossed out two name-brand funds and replaced them with similar, just-as-well-known funds.

The Turner Midcap Growth fund replaced Morgan Stanley’s Institutional Mid Cap Growth fund. In the realm of emerging market funds, American Funds New World superseded Templeton Developing Markets.

Morningstar’s selection committee makes its changes with reluctance. “These are supposed to be long-term holdings, after all,” writes senior analyst Emily Hall.

Thus the reasons for those changes, and for the other 15 selections in the experts’ portfolio, offer lessons for investors everywhere:

— Management interruptus was the reason for rejecting the Morgan Stanley fund. “Lead manager Arden Armstrong left the firm last year to start her own hedge fund. … The true appeal of this aggressive offering was Armstrong’s stunning record,” Hall noted.

The Turner replacement offers a solid track record, stable management and an “appealingly small” asset base, she added.

— High costs were the reason for axing Templeton. “The fund’s sizable expense ratio was a real turnoff,” in Hall’s recounting. “In addition, the fund’s deep-value approach led to a fairly streaky record.”

The New World fund also invests in emerging markets but with a few twists. It lists bonds as well as stocks. Part of its assets go into U.S. and European companies that do much of their business in emerging markets. “That unusual portfolio should help temper volatility over the long haul — an appealing thought in an incredibly bumpy asset class,” Hall writes.

For Morningstar, it’s a low-cost buy. But don’t reach for your checkbook yet. Note that Morningstar got a deal: Its employees don’t have to pay the 5.75 percent sales charge imposed on small investors. Hall said that waiver is available to companies that bring in certain amounts of assets. As it happens, Hall is the analyst who follows the New World fund for Morningstar and its subscribers. In her most recent assessment, she praises the management and says the fund “boasts a decent record and relatively low volatility.”

Noting the fund’s mix of investment choices, she concludes, “For mild-mannered investors who want an emerging-markets fund, this is a fine option.”

Turning to Morningstar’s investment philosophy for its 401(k), Hall said in an interview that the committee looks for firms that have performed well — compared with the returns of all funds with similar kinds of investments — over a long period.

Predictability also is important. “We have confidence that they’re not going to be monkeying with their objectives,” Hall said. “If we bought a fund for growth, it’s still going to be a growth fund five years from now.”

Another lesson is apparent from the Morningstar list: High turnover is not an automatic disqualification. Turnover is the measure of how frequently a manager buys and sells stocks or bonds in his portfolio. If you sold every share you owned during a given year and used the money to buy different stocks, you would have a turnover ratio of 100.

In general, high turnover is considered a warning flag. The fund would pay commissions for each trade, and gains would be taxable. But two of the Morningstar 401(k)’s stock funds have uncommonly high ratios: 260 for the newcomer Turner fund and 273 for the Brandywine fund. Even so, said Hall, the two have generated good returns.

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