Finding the best mutual funds is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available?
Don’t Trust Mutual Fund Labels
There are at least 871 different Large Cap Blend mutual funds and at least 6,083 mutual funds across twelve styles. Do investors need 506+ choices on average per style? How different can the mutual funds be?
Those 871 Large Cap Blend mutual funds are very different. With anywhere from 20 to 1385 holdings, many of these Large Cap Blend mutual funds have drastically different portfolios, creating drastically different investment implications.
The same is true for the mutual funds in any other style, as each offers a very different mix of good and bad stocks. Large Cap Blend funds rank first for stock selection. Small Cap Value funds rank last. Details on the Best & Worst mutual funds in each style are here.
Paralysis By Analysis
We think the large number of Large Cap Blend (or any other) style mutual funds hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many mutual funds. Analyzing mutual funds, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, that can be as many as 1385 stocks, and sometimes even more, for one mutual fund.
Any investor focused on fulfilling fiduciary duties recognizes that analyzing the holdings of a mutual fund is critical to finding the best mutual fund. Figure 1 shows our top rated mutual fund for each style.
Figure 1: The Best Mutual Fund in Each Style
Amongst the mutual funds in Figure 1, Nuveen Concentrated Core Fund (NCARX) ranks first overall, Legg Mason BW Diversified Large Cap Value Fund (LBISX) ranks second, and Smead Value Fund (SVFYX) ranks third. Harbor Mid Cap Value Fund (HNMVX) ranks last.Sources: New Constructs, LLC and company filings
How To Avoid “The Danger Within”
Why do you need to know the holdings of mutual funds before you buy?
You need to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the mutual fund’s performance will be bad. Don’t just take our word for it, see what Barron’s says on this matter.
PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND
If Only Investors Could Find Funds Rated by Their Holdings…
Nuveen Concentrated Core Fund (NCARX) is not only the top-rated Large Cap Blend mutual fund, but is also the best style mutual fund out of the 6,083 style mutual funds that we cover.
The mutual funds in Figure 1 all receive an Attractive-or-better rating. However, with so few assets in some of the funds, it is clear investors haven’t identified these quality mutual funds.
This article originally published here on November 15, 2016.
Disclosure: David Trainer, Kyle Guske and Kyle Martone receive no compensation to write about any specific stock, style, or theme.
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