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 842 different All Cap Value mutual funds and at least 5,372 mutual funds across twelve styles. Do investors need 447+ choices on average per style? How different can the mutual funds be?
Those 842 All Cap Value mutual funds are very different. With anywhere from 15 to 3,092 holdings, many of these All 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. All 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 All 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[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 3,092 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, as shown in The Journal of Financial Economics and proven to generate novel alpha, drives our research and analysis of fund holdings. 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, Royce Small Cap Value Fund (RVVHX) ranks second, and DWS CROCI Equity Dividend Fund (KDHTX) ranks third. Touchstone Mid Cap Fund (TMPRX) 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.
Hennessy Cornerstone Large Growth Fund (HILGX) is not only the top-rated All Cap Blend mutual fund but is also the overall top-rated style mutual fund out of the 5,372 style mutual funds that we cover.
The worst mutual fund in Figure 1 is Touchstone Mid Cap Fund (TMPRX), which still earns an Attractive rating.
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, style, 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.