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

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The All Cap Value style ranks fourth out of the twelve fund styles as detailed in our 2Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the All Cap Value style ranked fourth as well. It gets our Neutral rating, which is based on aggregation of ratings of 11 ETFs and 280 mutual funds in the All Cap Value style as of May 2, 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 Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 14 to 2010). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the All Cap Value 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_AllCapValue_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 1500 Value TILT ETF (VLU) is excluded from Figure 1 because its 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_AllCapValue_MFRatings_2Q16

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

Sources: New Constructs, LLC and company filings

Brown Advisory Value Equity Fund (BAFVX, BIAVX, BAVAX), CornerCap Large/Mid Cap Value Fund (CMCRX), and Aspiration Redwood Fund (REDWX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

First Trust Large Cap Value AlphaDEX Fund (FTA) is the top-rated All Cap Value ETF and AQR Large Cap Defensive Style Fund (QUERX) is the top-rated All Cap Value mutual fund. FTA earns an Attractive rating and QUERX earns a Very Attractive rating.

iShares Core US Value ETF (IUSV) is the worst rated All Cap Value ETF and Catalyst/MAP Global Capital Appreciation Fund (CAXAX) is the worst rated All Cap Value mutual fund. IUSV earns a Neutral rating and CAXAX earns a Very Dangerous rating.

Paccar Inc. (PCAR: $59/share) is one of our favorite stocks held by FTA and earns a Very Attractive rating. Since 1998, Paccar has grown after-tax profit (NOPAT) by 8% compounded annually. The company has improved its return on invested capital (ROIC) from 7% in 2010 to a top-quintile 19% in 2015. At the same time, Paccar has generated a cumulative $3.4 billion in free cash flow since 2010. Despite this profit growth, PCAR remains undervalued. At its current price of $59/share, PCAR has a price-to-economic book value (PEBV) ratio of 1.1. This ratio means that the market expects Paccar’s NOPAT to increase by only 10% over the remainder of its corporate life. If Paccar can grow NOPAT by just 7% compounded annually over the next decade, the stock is worth $76/share – a 29% upside.

Lazard, Ltd (LAZ: $36/share) is one of our least favorite stocks held by SAMVX and earns a Very Dangerous rating. Since 2006, Lazard’s NOPAT has declined by 28% compounded annually. The company’s ROIC has fallen from 68% in 2006 to a bottom-quintile 1% in the last twelve months. With such poor business fundamentals, it should come as no surprise that LAZ is down 10% over the past five years. However, LAZ remains significantly overvalued. To justify its current price of $36/share, Lazard must immediately achieve 8% pre-tax margins (1% over the last twelve months) and grow revenue by 18% compounded annually for the next 12 years. Given the business performance over the past nine years, this expectation seems overly optimistic.

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

Figure 3: Separating the Best ETFs From the Worst Funds

NewConstructs_AllCapValue_ETFLandscape_2Q16

Sources: New Constructs, LLC and company filings

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

NewConstructs_AllCapValue_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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