We’ve long argued (and proven empirically) that there is a strong correlation between improving ROIC and increasing shareholder value. Nevertheless, the majority of mutual funds managers continue to pick stocks based on flawed metrics that show no correlation to shareholder value, such as price-to-earnings ratios, return on equity, or accounting book value.

We recommend avoiding funds with managers who consider accounting earnings as representative of “fundamentals”. Instead, look for managers that focus on return on invested capital (ROIC)[1].

Next, you should verify that the focus on ROIC is more than just a marketing ploy. The only way to ensure managers apply real diligence and rigor in ROIC research is to evaluate the ROICs of their holdings.

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We analyze[2] the ROICs for all the holdings of over 7,500 U.S. ETFs and mutual funds daily to identify which fund managers put their analytical money where their mouth is. Occasionally, we come across a fund whose managers diligently leverage ROIC in their investment strategy. This week we are featuring one such fund,

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