The Best and Worst of the All Cap Blend Style 2Q16

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The All Cap Blend style ranks third out of the twelve fund styles as detailed in our 2Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the All Cap Blend style ranked third as well. It gets our Neutral rating, which is based on aggregation of ratings of 71 ETFs and 684 mutual funds in the All Cap Blend style as of April 29, 2016. See a recap of our 1Q16 Style Ratings here.

Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all All Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 4 to 3694). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the All Cap Blend style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.

Figure 1: ETFs with the Best & Worst Ratings – Top 5

NewConstructs_AllCapBlend_ETFRatings_2Q16

* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

State Street SPDR S&P 5000 Buyback ETF (SPYB), iShares Enhanced U.S. Large Cap ETF (IELG), and ProShares Ultra Semiconductors (USD) are excluded from Figure 1 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5

NewConstructs_AllCapBlend_MFRatings_2Q16

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

Sources: New Constructs, LLC and company filings

AMG Renaissance Large Cap Growth Fund (MRLIX, MRLSX, MRLTX), Jensen Quality Value Fund (JNVIX, JNVSX), and Hays U.S. Opportunity Fund (HUOIX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

ProShares UltraPro Dow30 (UDOW) is the top-rated All Cap Blend ETF and Royce Special Equity Multi-Cap Fund (RMUIX) is the top-rated All Cap Blend mutual fund. Both earn a Very Attractive rating.

ProShares Ultra Oil & Gas (DIG) is the worst rated All Cap Blend ETF and Rydex Series Russell 2000 1.5x Strategy Fund (RYAKX) is the worst rated All Cap Blend mutual fund. Both earn a Very Dangerous rating.

Nordstrom (JWN: $51/share) is one of our favorite stocks held by RMUIX and earns a Very Attractive rating. Over the past decade, Nordstrom has grown after-tax profit (NOPAT) by 9% compounded annually. Over this time, the company has improved its return on invested capital (ROIC) from 9% in 2005 to 11% over the last twelve months. Nordstrom has also generated a cumulative $2.3 billion in free cash flow over the past five years. Despite the underlying fundamentals, JWN remains undervalued. At its current price of $51/share, JWN has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means that the market expects Nordstrom’s NOPAT to permanently decline by 10%. If Nordstrom can grow NOPAT by just 5% compounded annually for the next decade, the stock is worth $94/share today – an 84% upside.

Molson Coors Brewing Company (TAP: $96/share) is one of our least favorite stocks held by VGPAX and earns a Dangerous rating. Since 2010, Molson Coors’ NOPAT has declined by 2% compounded annually. The company’s ROIC has fallen from 8% to 6% over this same timeframe. Molson Coors has failed to generate positive economic earnings in any year of our model, which dates back to 1998. To justify its current price of $96/share, Molson Coors must grow NOPAT by 10% compounded annually for the next 11 years. This expectation seems overly optimistic given the company’s profit decline since 2010.

Figures 3 and 4 show the rating landscape of all All Cap Blend ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst Funds

NewConstructs_AllCapBlend_ETFLandscape_2Q16

Sources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Funds

NewConstructs_AllCapBlend_MFLandscape_2Q16

Sources: New Constructs, LLC and company filings

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

Click here to download a PDF of this report.

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