The Large Cap Blend style ranks first out of the twelve fund styles as detailed in my Style Rankings for ETFs and Mutual Funds report. It gets my Neutral rating, which is based on aggregation of ratings of 35 ETFs and 963 mutual funds in the Large Cap Blend style as of April 15, 2014. Prior reports on the best & worst ETFs and mutual funds in every sector and style are here.
Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Large Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 14 to 1022), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst, which allocate too much value to Neutral-or-worse-rated stocks.
To identify the best and avoid the worst ETFs and mutual funds within the Large Cap Blend style, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed here.
Investors seeking exposure to the Large Cap Blend style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.
Figure 1: ETFs with the Best & Worst Ratings – Top 5
Sources: New Constructs, LLC and company filings
PowerShares RAFI Fundamental Pure Large Core Portfolio (PXLC), State Street SPDR MFS Systematic Core Equity ETF (SYE), and iShares Russell Top 200 ETF (IWL) are excluded from Figure 1 because their total net assets (TNA) are below $100 million and do not meet our liquidity standards.
Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5
Sources: New Constructs, LLC and company filings
Blue Chip Investor Fund: Blue Chip Investor Fund (BCIFX) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity standards.
PowerShares S&P 500 High Quality Portfolio (SPHQ) is my top-rated Large Cap Blend ETF and GMO Trust: GMO Quality Fund (GQLOX) is my top-rated Large Cap Blend mutual fund. SPHQ earns my Neutral rating and GQLOX earns my Attractive rating.
ALPS/GS Risk-Adjusted Return U.S. Large Cap Index ETF (GSRA) is my worst-rated Large Cap Blend ETF and AllianceBernstein Select US Equity Portfolio (AUUAX) is my worst-rated Large Cap Blend mutual fund. GSRA earns my Dangerous rating and AUUAX earns my Very Dangerous rating.
Figure 3 shows that 228 out of the 1586 stocks (over 29% of the market value) in Large Cap Blend ETFs and mutual funds get an Attractive-or-better rating. However, no Large Cap Blend ETFs and just 10 out of 963 Large Cap Blend mutual funds (less than 1% of total net assets) get an Attractive-or-better rating.
The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and Large Cap Blend ETFs hold poor quality stocks.
Figure 3: Large Cap Blend Style Landscape For ETFs, Mutual Funds & Stocks
Investors need to tread carefully when considering Large Cap Blend ETFs and mutual funds, no ETFs and only 10 mutual funds in the Large Cap Blend style allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating.
AFLAC Inc. (AFL) is one of my favorite stocks held by Large Cap Blend ETFs and mutual funds and earns my Attractive rating. Over the past decade, AFL has grown after-tax profits (NOPAT) by 15% compounded annually. The company currently earns a top quintile return on invested capital (ROIC) of 16%, the best of the 19 life and health insures we cover. Despite its track record of growth and profitability, AFL is priced for stagnation. At its current valuation of ~$62/share, AFL has a price to economic book value (PEBV) ratio of 1.0. This ratio implies the market expects AFL to never grow NOPAT by any meaningful amount. Low expectations combined with a strong track record of growth make AFL a low risk/high reward stock.
DreamWorks Animation SKG, Inc. (DWA) is one of my least favorite stocks held by Large Cap Blend ETFs and mutual funds and earns my Very Dangerous rating. Since going public in 2004, DWA’s NOPAT has declined by 17% compounded annually. At the same time, the company’s ROIC has fallen from 38% to a bottom quintile 4%. In the last three years, DWA has generated negative and declining economic earnings. As I’ve argued many times before, creating original content is hard. Almost nobody can consistently create quality, original content that appeals to large audiences, especially when you have to compete with Disney/Pixar (DIS) and Universal Studios (CMCSA).
Given DWA’s declining profits and increasing competition [Warner Bros (TWX) is making animated movies again after over a decade without a feature film], the stock is trading at far too high a valuation. To justify its current price of ~$27/share, DWA would need to grow NOPAT by 11% compounded annually for the next 34 years. Those expectations are way too high. Investors should avoid DWA.
Figures 4 and 5 show the rating landscape of all Large Cap Blend ETFs and mutual funds.
My Style Rankings for ETFs and Mutual Funds report ranks all styles and highlights those that offer the best investments.
Figure 4: Separating the Best ETFs From the Worst Funds
Figure 5: Separating the Best Mutual Funds From the Worst Funds
Review my full list of ratings and rankings along with reports on all 35 ETFs and 963 mutual funds in the Large Cap Blend style.
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Kyle Guske II contributed to this report.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector, style or theme.