With an ever-growing list of similar-sounding mutual funds to choose from, finding the best is an increasingly difficult task. How can investors shift the odds in their favor?
Don’t Trust Mutual Fund Labels
There are at least 152 different Technology mutual funds and at least 627 mutual funds across eleven sectors. Do investors need 57+ choices on average per sector? How different can mutual funds be?
Those 152 Technology mutual funds are very different from each other. With anywhere from 23 to 373 holdings, many of these mutual funds have drastically different portfolios with differing risk profiles and performance outlooks.
The same is true for the mutual funds in any other sector, as each offers a very different mix of good and bad stocks. Energy ranks first for stock selection. Utilities ranks last. Details on the Best & Worst Mutual Funds in each sector are here.
Avoiding Analysis Paralysis
We think the large number of sector mutual funds hurts investors more than it helps. Manually conducting a deep analysis for every fund is simply not a realistic option. As a result, investors conduct insufficient analysis and miss profitable opportunities. Analyzing mutual funds with the proper diligence[1] is far more complex than analyzing stocks because it means analyzing all holdings within each mutual fund. As stated above, there can be as many as 373 stocks or more for one mutual fund.
Anyone focused on fulfilling the fiduciary duty of care recognizes that analyzing the holdings[2] of a mutual fund is critical to finding the best mutual fund. More reliable & proprietary fundamental data, proven in The Journal of Financial Economics, drives our research and analysis of fund holdings and provides investors with a new source of alpha. Figure 1 shows our top-rated mutual fund for each sector.
Figure 1: The Best Mutual Fund in Each Sector
* Best Mutual Funds excludes funds with Total Net Assets (TNA) under $100 million due to inadequate liquidity
Sources: New Constructs, LLC and company filings
Amongst the mutual funds in Figure 1, BlackRock Natural Resources Trust (MAGRX) ranks first overall, Fidelity Select Banking Portfolio (FSRBX) ranks second, and Schwab Health Care Fund (SWHFX) ranks third. Gabelli Utilities Fund (GAUIX) ranks last.
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 – FEES = PERFORMANCE OF FUND
Analyzing each holding within funds is no small task. Our Robo-Analyst technology enables us to perform this diligence at scale and provide the research needed to fulfill the fiduciary duty of care. More of the biggest names in the financial industry (see At BlackRock, Machines Are Rising Over Managers to Pick Stocks) are now leveraging technology in the investment research process. Technology may be the only solution to the dual mandate for research: cut costs and fulfill the fiduciary duty of care. Investors, clients, advisors, and analysts deserve the latest in technology to get the diligence required to make prudent investment decisions.
If Only Investors Could Find Funds Rated by Their Holdings
Our mutual fund ratings leverage our stock coverage. We rate mutual funds based on the aggregated ratings of the stocks each mutual fund holds.
BlackRock Natural Resources Trust (MAGRX) is not only the top-rated Energy mutual fund, but is also the overall top-rated sector mutual fund out of the 627 sector mutual funds that we cover.
The worst mutual fund in Figure 1 is Gabelli Utilities Fund (GAUIX), which gets an Unattractive rating. One would think mutual fund providers could do better for this sector.
This article was originally published on February 6, 2023.
Disclosure: David Trainer, Kyle Guske II, and Italo Mendonça receive no compensation to write about any specific stock, sector, or theme.
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[1] Three independent studies from respected institutions prove the superiority of our data, models, and ratings. Learn more here.
[2] Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.