Every investor has seen some version of the disclaimer “past performance is not an indicator of future performance”, yet, past performance drives nearly all fund ratings – except ours.
We think the quality of the fund’s holdings matters more than past performance. That’s why our Predictive Fund Ratings are built on the ratings of the fund’s holdings. If the fund hold bad stocks, performance is likely to be bad too. And, vice versa.
This week’s Danger Zone pick is a fund that allocates way too much capital to bad stocks.
More details are below in the excerpt from our full report on this Danger Zone pick, available to Pro and Institutional members. You can buy the full report a la carte here.
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Forward-Looking Research Protects Investors
While legacy fund research is backward-looking, our fund research is forward-looking and based on proven-superior fundamental analysis and ratings on each individual holding.
This fund earns our Very Unattractive (equivalent to Morningstar’s 1 Star) rating while Morningstar (MORN) gives the fund a 3 Star rating.
Figure 1: Comparing Fund Ratings
Sources: New Constructs, LLC, company filings, mutual fund filings, and Morningstar
Holdings Research Reveals a Low-Quality Mid Cap Blend Portfolio
Our Robo-Analyst AI analyzed the holdings of this fund and finds that they are much worse than its lower-cost benchmark, which earns a Neutral rating.
Per Figure 2 in the full report, the fund allocates 85% of its assets to Unattractive-or-worse rated stocks compared to 44% for the benchmark. On the flip side, the fund allocates only 5% of its assets to Attractive-or-better rated stocks compared to 11% for the benchmark.
Per Figure 3 in the full report, our holdings analysis also reveals the fund’s portfolio is lower quality than the S&P 500, as represented by State Street SPDR S&P 500 ETF (SPY), which earns an Attractive rating.
At 58% of its portfolio, SPY allocates less to Unattractive-or-worse rated stocks compared to this fund. SPY also allocates slightly more to Attractive-or-better rated stocks (7%) compared to this fund (5%).
Expensive Stocks Drive Very Unattractive Risk/Reward Rating
Figure 4 in the full report shows our detailed rating for this fund, which includes each of the criteria we use to rate all ETFs and mutual funds under coverage. These criteria are the same for our Stock Rating Methodology, as the performance of a mutual fund equals the performance of its holdings minus fees.
Figure 4 also shows this fund is inferior to its benchmark and SPY in four of the five criteria that make up our Portfolio Management rating.
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