How To Find the Best Style Mutual Funds 3Q18

David Trainer  |

Finding the best mutual funds is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available?

Don’t Trust Mutual Fund Labels

There are at least 911 different Large Cap Value mutual funds and at least 6405 mutual funds across twelve styles. Do investors need 533+ choices on average per style? How different can the mutual funds be?

Those 911 Large Cap Value mutual funds are very different. With anywhere from 17 to 955 holdings, many of these Large Cap Value mutual funds have drastically different portfolios, creating drastically different investment implications.

The same is true for the mutual funds in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Growth ranks last. Details on the Best & Worst mutual funds in each style are here.

How to Avoid Paralysis by Analysis

We think the large number of Large Cap Value (or any other) style mutual funds hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many mutual funds. Analyzing mutual funds, done with the proper diligence[1], is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, that can be as many as 955 stocks, and sometimes even more, for one mutual fund.

Anyone focused on fulfilling the fiduciary duty of care recognizes that analyzing the holdings[2] of a mutual fund is critical to finding the best mutual fund. Figure 1 shows our top rated mutual fund for each style.

Figure 1: The Best Mutual Fund in Each Style

Sources: New Constructs, LLC and company filings

* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity

Amongst the mutual funds in Figure 1, Brandywine Global Diversified US Large Cap Value (LBISX) ranks first overall, Hennessy Cornerstone Large Growth Fund (HILGX) ranks second, and Fidelity Advisor Dividend Growth Fund (FZADX) ranks third.

How to Avoid “The Danger Within”

Why do you need to know the holdings of mutual funds before you buy?

You need to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the mutual fund’s performance will be bad. Don’t just take my word for it, see what Barron’s says on this matter.

PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND

Analyzing each holding within funds is no small task. Our Robo-Analyst technology enables us to perform this diligence with scale and provide the research needed to fulfill the fiduciary duty of care. More of the biggest names in the financial industry (see At BlackRock, Machines Are Rising Over Managers to Pick Stocks) are now embracing technology to leverage machines in the investment research process. Technology may be the only solution to the dual mandate for research: cut costs and fulfill the fiduciary duty of care. Investors, clients, advisors and analysts deserve the latest in technology to get the diligence required to make prudent investment decisions.

If Only Investors Could Find Funds Rated by Their Holdings

Our mutual fund ratings leverage our stock coverage. We rate mutual funds based on the aggregated ratings of the stocks each mutual fund holds.

Brandywine Global Diversified U.S. Large Cap Value (LBISX) is not only the top-rated Large Cap Value mutual fund, but is also the overall top-ranked style mutual fund out of the 6405 style mutual funds that we cover.

The mutual funds in Figure 1 all receive an Attractive-or-better rating. However, with so few assets in some of the funds, it’s clear investors haven’t identified these quality mutual funds.

This article originally published on July 30, 2018.

Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.

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[1] Ernst & Young’s recent white paper “Getting ROIC Right” proves the superiority of our holdings research and analytics.

[2] Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts

DISCLOSURE: Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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