Many actively managed mutual funds operate with “black box” strategies that give investors little information about how the managers pick stocks. Fund documents will give vague platitudes about how the managers use “fundamental analysis” to find “highly profitable” companies that are “undervalued”, but these terms lack clear definition.
This lack of clarity is a significant problem for investors. A manager that uses “fundamental research” that is based on analysis of accounting earnings and flawed metrics such as price to earnings or price to book is not as reliable as a manager that focuses on return on invested capital (ROIC).
Even if managers claim they leverage ROIC in the process, investors usually have no way of verifying this claim. Leveraging our Robo-Analyst technology, which analyzes the holdings of all 7,764 ETFs and mutual funds under coverage, we found a mutual fund with managers that put their money where their mouth is when it comes to ROIC. Despite its high quality, investors seem to be avoiding this fund due to its three-star Morningstar rating. This mutual fund,