Have you ever bought a grab bag of items, and upon finding what’s inside, feel nothing but disappointment?

Investing in ETFs and mutual funds can create a similar feeling. You buy a fund based on its stated methodology or even its top 10 holdings, only to find disappointment when it underperforms.

Fund investing doesn’t have to be a grab-bag purchase! There is a better way.

Similar to stock picking, investors can find quality funds if they conduct proper due diligence. Our fund ratings are based on analyzing all the holdings of a fund, not past performance. After all, the stocks in a fund drive its performance.

After highlighting a bad fund earlier this week, we present the opposite: a mutual fund that offers Very Attractive Risk/Reward.

This week’s Long Idea is a fund that focuses on fundamentals, with a focus on free cash flow. The fund identifies profitable businesses that trade at prices much cheaper than the stocks held in its respective benchmark. Importantly, it does so while charging below average fees.

We hope you enjoy this latest piece of free research. It is from our latest Long Idea report published this week, available to Pro and Institutional members. You can buy the full report a la carte here. We’re not giving you the ticker for this pick, but we are happy to share our hard work because we want you to see how good our research is. Always let us know how we can provide more value to you.

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Backwards Looking Research Underrates This Fund

While legacy fund research is backward-looking, our fund research is forward-looking and based on proven-superior fundamental analysis on each individual holding.

When viewed through our Predictive Risk/Reward Fund Rating methodology, this fund earns a Very Attractive rating. Meanwhile, Morningstar gives the fund a 2 Star rating.

The other share class of the mutual fund also earns a Very Attractive rating while Morningstar rates it 3 Stars. See Figure 1.

Figure 1: Comparing Fund Ratings

Sources: New Constructs, LLC, company filings, mutual fund filings, and Morningstar

Higher quality holdings and lower average costs mean this fund is more likely to outperform in the future, which is something traditional fund research can’t tell you.

How Our Forward-Looking Research Reveals a Very Attractive Fund

Our analysis of this fund’s holdings reveals the fund allocates more to high-quality stocks, i.e. profitable companies with undervalued stock prices, than its benchmark.

We leverage our Robo-Analyst AI Agent to assess a mutual fund’s portfolio quality by analyzing the fund’s individual stock holdings.

Through this rigorous analysis, we find that this fund allocates 31% of its assets to Attractive-or-better rated stocks compared to just 15% for the benchmark. On the flip side, this fund allocates just 14% of its assets to Unattractive-or-worse rated stocks compared to 37% for the benchmark, per Figure 2 in the full report.

Per Figure 3 in the full report, our holdings analysis also reveals this fund’s portfolio is of much higher quality than the S&P 500, as represented by State Street SPDR S&P 500 ETF Trust (SPY). SPY earns our Attractive rating, but only 7% of its portfolio is allocated to stocks rated Attractive-or-better while 43% is allocated to stocks rated Unattractive-or-worse.

Quality Stocks Drive Very Attractive 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 mutual funds under coverage. These criteria are the same for our Stock Rating Methodology, because the performance of a mutual fund’s holdings drives the performance of the mutual fund after fees.

…there’s much more in the full report. You can buy the report a la carte here.

Or, become a Professional or Institutional member – they get all Long Idea reports.

I’ll keep sending information on quality sectors, industries, or specific companies until you’re ready to start your membership, but know that we expect this pick to outperform.

Interested in starting your membership to get access to all our Long Ideas? Get more details here.