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 893 different Large Cap Value mutual funds and at least 6304 mutual funds across twelve styles. Do investors need 525+ choices on average per style? How different can the mutual funds be?
Those 893 Large Cap Value mutual funds are very different. With anywhere from 16 to 1085 holdings, many of these Large Cap Value mutual funds have drastically different portfolios, creating drastically different investment implications.
The same is true for the mutual funds in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Growth ranks last. Details on the Best & Worst mutual funds in each style are here.
How to Avoid Paralysis by Analysis
We think the large number of Large Cap Value (or any other) style 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, 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 1085 stocks, and sometimes even 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. Figure 1 shows our top-rated mutual fund for each style.
Figure 1: The Best Mutual Fund in Each Style
* 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, Hennessy Cornerstone Large Growth Fund (HILGX) ranks first overall, Deutsche DWS CROCI U.S. Fund (DCURX) ranks second, and Catalyst/Lyons Tactical Allocation Fund (CLTIX) ranks third. Virtus KAR Small Cap Core Fund (VSCRX) 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
Hennessy Cornerstone Large Growth Fund (HILGX) is not only the top-rated All Cap Blend mutual fund, but is also the overall top-ranked style mutual fund out of the 6304 style mutual funds that we cover.
The mutual funds in Figure 1 all receive an Attractive-or-better rating. However, with so few assets in some of the funds, it’s clear investors haven’t identified these quality mutual funds.
This article originally published on October 30, 2018.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector, or theme.
 Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.