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 176 different Real Estate mutual funds and at least 576 mutual funds across eleven sectors. Do investors need 52+ choices on average per sector? How different can the mutual funds be?
Those 176 Real Estate mutual funds are very different. With anywhere from 25 to 170 holdings, many of these Real Estate mutual funds have drastically different portfolios, creating drastically different investment implications.
The same is true for the mutual funds in any other sector, as each offers a very different mix of good and bad stocks. Basic Materials ranks first for stock selection. Energy ranks last. Details on the Best & Worst mutual funds in each sector are here.
How to Avoid Paralysis by Analysis
We think the large number of Real Estate (or any other) sector 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[1], 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 170 stocks, and sometimes even 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 exclude funds with TNAs less than $100 million for inadequate liquidity
Sources: New Constructs, LLC and company filings
Amongst the mutual funds in Figure 1, Vanguard Consumer Staples Index Fund (VCSAX) ranks first overall, Putnam Global Health Care Fund (PHGAX) ranks second, and Fidelity Select Consumer Finance Portfolio (FSVLX) ranks third. Advisors’ Inner Circle Knights of Columbus Real Estate Fund (KCRIX) 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 my word for it, see what Barron’s says on this matter.
PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND
Analyzing each holding within funds is no small task. Our Robo-Analyst technology enables us to perform this diligence with 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 embracing technology to leverage machines 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.
Vanguard Consumer Staples Index Fund (VCSAX) is not only the top-rated Consumer Non-cyclicals mutual fund but is also the overall top-rated sector mutual fund out of the 576 sector mutual funds that we cover.
The worst mutual fund in Figure 1 is Advisors’ Inner Circle Knights of Columbus Real Estate Fund (KCRIX), which gets an Unattractive rating. One would think mutual fund providers could do better for this sector.
This article originally published on October 21, 2021.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler 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.