With an ever-growing list of similar-sounding mutual funds to choose from, finding the best is an increasingly difficult task. How can investors change the game to shift the odds in their favor?
Don’t Trust Mutual Fund Labels
There are at least 169 different Real Estate mutual funds and at least 673 mutual funds across eleven sectors. Do investors need 61+ choices on average per sector? How different can the mutual funds be?
Those 169 Real Estate mutual funds are very different from one another. With anywhere from 23 to 167 holdings, many of these Real Estate 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 distinct mix of good and bad stocks. Basic Materials ranks first for stock selection. Real Estate 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, exposing investors to insufficient analysis and causing them to miss profitable opportunities. Analyzing mutual funds properly[1] is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, there can be as many as 167 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 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, Fidelity Advisor Global Commodity Stock Fund (FIQRX) ranks first overall, Fidelity Select Banking Portfolio (FSRBX) ranks second, and Schwab Health Care Fund (SWHFX) ranks third. CGM Realty Fund (CGMRX) ranks last.
How to Avoid “The Danger Within”
Why do you need to know the holdings of mutual funds before you buy?
A mutual fund is nothing more than the sum of its component parts – if you don’t understand what it’s made of, you ultimately won’t understand what you’re buying. It would belike 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 – FEES = 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.
Fidelity Advisor Global Commodity Stock Fund (FIQRX) is not only the top-rated Energy mutual fund, but is also the overall top ranked sector mutual fund out of the 673 sector mutual funds that we cover.
The worst mutual fund in Figure 1 is CGM Realty Fund (CGMRX), which gets an Unattractive rating. One would think mutual fund providers could do better for this sector.
This article originally published on October 26, 2022.
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.