There was no red carpet and no televised interviews with famous fund managers. No one teared up giving an acceptance speech.

But the 2006 Lipper Fund Awards — and in fact any of the awards given out by the major research and data firms — should have left an impression on investors.

The Lipper Fund Awards, annual prizes first presented in 2003, reward "consistently strong risk-adjusted performance." What investors should be focused on with the Lipper prizes, as well as Morningstar's Fund Manager of the Year awards, is not the names of the winners but the method for choosing them.

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A ratings firm sticking its neck out to make a fund pick is as close as the data firms will ever come to saying "This is how we decide where we put our own cash." In each case, it's a process worth observing and learning from.

For example, Lipper hangs its hat on consistent performance.

Lipper's rating system has five broad criteria for measuring funds: total return, consistent return, preservation of capital, expenses and tax efficiency. But when it comes time to put the company's good name on the line, consistency rules the roost. Oversimplifying the rest of the process used for the awards, the four other criteria wind up being used to sort out which of the steady winners deserves the trophy.

"Most investors look at total return first — and sometimes it's all they look at," says Bill Sickles, senior research analyst for Lipper. "We think that consistent return really focuses in on risk. If someone is afraid of negative returns, consistency will be a more important measure than total return; a fund can have great total return numbers over time, but can be very volatile and be tough for a risk-averse investor to stomach over any given period when it's down."

For investors the lesson isn't "think consistent return" but rather to determine how to present their own awards to fund firms because that is precisely the prize that fund companies are vying for.

Typically when financial advisers and fund experts talk about selecting funds they start with personal goals and objectives.

That is the correct place to start, deciding what you want a fund to accomplish. But once you know that you're looking for a certain asset class for a specific reason — say an international fund to diversify your portfolio — the question boils down to "What specific characteristics do you value most?"

For example, Steven McKee, editor of the No-Load Mutual Fund Selection & Timing newsletter, uses a model that focuses on short-term performance. Effectively, he is looking to buy funds that rank in the top 5% of a peer group focused on assets that have been hot lately. He will sell the fund when it is no longer in the top 20% of the peer group.

Likewise, a consumer could easily use Lipper's data to choose funds by key elements. Many investors like to focus on total return and expenses, noting that low costs make it easier to generate big gains and that a fund with high marks in both of those areas has proven that to be true.

Some investors zero in on tax-efficiency, noting that big distributions can be a real drag on after-tax returns.

Investors need to decide which elements they value the most and then prioritize the other criteria. Too often they rely on stars, dollar signs or some other broad measure and they don't understand precisely how the ranking system works.

The nervous investor values preservation of capital first, while the buy-and-hold investor may, like Lipper, put a premium on consistency. The person who is interested in market-timing is looking at total return over short time periods.

The criteria may also change depending on the way the fund will be used. Tax efficiency isn't a factor in retirement accounts — where taxes are deferred — but might be a key consideration for someone looking to open a new taxable account.

Having a methodology like Lipper's (or McKee's) creates the confidence necessary to not only purchase an investment but stick with it. It also helps to show when it's time to exit.

Says Sickles: "Many people can say why they pick a fund, but they can't say what they actually are looking for. They say 'It won a Lipper award,' or 'It's a Lipper Leader in two categories' without actually thinking about whether those categories are the ones that really matter. ... All investors can have their own criteria."

So see if your current holdings win any awards from you. Examine the performance you've had and see if the fund represents the qualities you hold most dear.

If a fund doesn't deserve a walk up your personal red carpet, you may want to walk it right out of your portfolio.

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Copyright (c) 2006 MarketWatch, Inc.