How To Find The Best Sector Mutual Funds: Q3’15
Summary The large number of mutual funds hurts investors more than it helps as too many options become paralyzing. Performance of a mutual funds holdings are equal to the performance of a mutual fund. Our coverage of mutual funds leverages the diligence we do on each stock by rating mutual funds based on the aggregated ratings of their holdings. 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 225 different Financials mutual funds and at least 632 mutual funds across ten sectors. Do investors need 63+ choices on average per sector? How different can the mutual funds be? Those 225 Financials mutual funds are very different. With anywhere from 22 to 523 holdings, many of these Financials mutual funds have drastically different portfolios, creating drastically different investment implications. The same is true for the mutual funds in any other sector, as each offers a very different mix of good and bad stocks. Consumer Staples ranks first for stock selection. Energy ranks last. Details on the Best & Worst mutual funds in each sector are here . A Recipe for Paralysis By Analysis We firmly believe mutual funds for a given sector should not all be that different. We think the large number of Financials (or any other) sector 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 523 stocks, and sometimes even more, for one mutual fund. Any investor worth his salt 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 sector. Figure 1: The Best Mutual Fund in Each Sector (click to enlarge) Sources: New Constructs, LLC and company filings 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 If Only Investors Could Find Funds Rated by Their Holdings… Oak Associates Red Oak Technology Select Fund (MUTF: ROGSX ) is the top-rated Information Technology mutual fund and the overall best fund of the 632 sector mutual funds that we cover. The worst mutual fund in Figure 1 is Vanguard World Utilities Index Fund (MUTF: VUIAX ), which gets a Neutral rating. One would think mutual fund providers could do better for this sector. Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, sector, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.