Picking good stocks is hard, which is why many investors are drawn to ETFs and mutual funds.
The problem with that strategy is that it assumes fund managers pick good stocks when, for decades, we’ve known that 75%+ funds underperform their benchmarks every year. Every year!!
So, how can you gain insight into whether or not a fund will outperform? Look at past price performance? No. How about analyzing each of the holdings of a fund? Yes!
That’s exactly what we do for our forward-looking Fund Ratings for 7,600+ ETFs and mutual funds.
After scouring our coverage universe, we found a mid-cap mutual fund that allocates the majority of its capital to bad stocks. To make matters worse, it charges well above-average fees for its below average (compared to the benchmark and overall market) portfolio.
In other words, we found a fund that invests in bad stocks and charges high fees. Talk about a double whammy.
You’ll want to be sure you steer clear of this fund. And, because Morningstar gives this fund more positive ratings, we worried that a lot of investors might be invested in this fund.
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Forward-Looking Research Protects Investors
Figure 1 in the full report shows how our forward-looking Fund Ratings compare to Morningstar’s (MORN) ratings. We rate this fund Very Unattractive (equivalent to Morningstar’s 1 Star) while Morningstar gives the fund a 4 Star rating. Two other share classes of the fund also earn a 4 Star rating while we rate them Unattractive.
Figure 1: Comparing Fund Ratings
Sources: New Constructs, LLC, company filings, mutual fund filings, and Morningstar
Holdings Research Reveals a Low-Quality Mid Cap Portfolio
Our holdings analysis, which leverages our Robo-Analyst technology, reveals that this fund holds lower-quality stocks than its benchmark. For reference, the benchmark earns an Attractive rating.
Per Figure 2 in the full report, this fund allocates 57% of its portfolio to Unattractive-or-worse rated stocks compared to 45% for the benchmark. On the flip side, this fund allocates only 9% of its assets to Attractive-or-better rated stocks compared to 14% for the benchmark.
Per Figure 3 in the full report, our holdings analysis also reveals this 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 just 33% of its portfolio, SPY allocates less to Unattractive-or-worse rated stocks compared to this fund.
Expensive Stocks Drive Very Unattractive Risk/Reward Rating
Figure 4 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 in the report shows this fund is inferior to the benchmark in four of the five criteria that make up our Portfolio Management rating.
….there’s much more in the full report. You can buy the report a la carte here.
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