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 156 different Real Estate mutual funds and at least 608 mutual funds across eleven sectors. Do investors need 55+ choices on average per sector? How different can the mutual funds be?
Those 156 Real Estate mutual funds are very different from each other. With anywhere from 22 to 160 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 different mix of good and bad stocks. Energy ranks first for stock selection. Telecom Services 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 missing profitable opportunities. Analyzing mutual funds, 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, there can be as many as 160 stocks or more for one mutual fund.
Anyone focused on fulfilling the fiduciary duty of care recognizes that analyzing the holdings 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 filing
Amongst the mutual funds in Figure 1, BlackRock Natural Resources Trust (MAGRX) ranks first overall, Fidelity Banking Portfolio (FSRBX) ranks second, and Schwab Health Care Fund (SWHFX) ranks third. Baron Real Estate Fund (BREIX) 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 – 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
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 608 sector mutual funds that we cover.
The worst mutual fund in Figure 1 is Baron Real Estate Fund (BREIX), which gets an Unattractive rating. One would think mutual fund providers could do better for this sector.
This article was originally published on October 24, 2023.
Disclosure: David Trainer, Kyle Guske II, Hakan Salt, and Italo Mendonça receive no compensation to write about any specific stock, sector, or theme.
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 Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.