Tag Archives: mutual-fund

3 Mutual Funds To Defy 4-Week Outflows In The U.S.

Cash draining out from the pocket is always hard to accept. On that note, spare a thought for the U.S. stock and taxable-bond mutual funds that have witnessed outflows for four consecutive weeks. For the week ended Dec 2, U.S. stock and taxable-bond mutual funds saw outflows of $6.6 billion, according to Lipper data. Amid this, the 1-month category return of funds is equally dismal. While the U.S. stock and taxable-bond mutual funds are witnessing continuous outflows, stock ETFs attracted $3.8 billion in the week ended Dec 2. Some may believe that this sector might be in for a Santa Claus rally. However, mutual fund investors need not lose heart. Some low-cost mutual funds, each carrying a favorable Zacks Mutual Fund Rank, have emerged out of the weakness over the past four weeks, and are expected to continue their uptrend. Before we pick these funds, let’s look at the recent fund flows and key events. What’s Taking the Cash Out? The outflows from the U.S. stock and taxable-bond mutual funds started from the week ending Nov 11. For that week itself, taxable bond funds in the U.S. saw outflows of $3.7 billion. This was the worst outflow of taxable bond funds from the week ended Sep 30. U.S. stock funds recorded $1 billion of outflows in the week ended Nov 11, reversing the five-week run of inflows. Since then, the rate hike expectations primarily caused investors to pull money out of these mutual funds. To add to the confusion about the direction of the Fed’s policy, geopolitical concerns and mixed economic data further kept the cash from flowing in. Investors hunted for clues on the Fed’s policy move throughout November. The markets remained hopeful that the U.S. central bank may finally embark on a rate hike in December. Backing this belief were multiple comments from key Fed officials and the FOMC minutes. Last Friday, a strong U.S. jobs report affirmed chances of the Fed raising rates in two weeks. Markets were also exposed to certain geopolitical concerns. Multiple terrorist attacks in Paris, heightened violence in the Middle East, news of the shooting down of a Russian fighter jet near the border of Syria and concerns about China’s economic situation dampened investor sentiment. The 1-Month Performance The broader markets struggled over the past one month. The Dow Jones Industrial Average lost 1.9% over the last 4 weeks, while the Standard & Poor’s 500 (.INX) and Nasdaq Composite Index are down 1.7% and 1%, respectively. Among the 12 S&P industry groups, only three have positive one-month return. While Consumer Staples (NYSEARCA: XLP ) leads with a one-month gain of 2.58%, Real Estate (NYSEARCA: XLRE ) is up 2.57%. Utilities (NYSEARCA: XLU ) scored a 0.8% gain. In comparison, the one-month losses are significantly higher. Energy (NYSEARCA: XLE ) slumped 10.8%, followed by a 2.5% loss in Financial Services (NYSEARCA: XLFS ). Coming to the mutual funds category performances, Equity Precious Metals currently leads the one-month gains and is up 3.1%. All the other sectors in the green have sub 2% gain. Here too, the one-month losses are sufficiently higher. Energy Limited Partnership and Equity Energy categories have lost 19.8% and 9.8%, respectively. Below we present the best and worst performing mutual fund categories over the past one month: 1-Month Fund Category Performance (as of Dec 8) Best Gainers 1-M Total Return Worst Performers 1-M Total Return Equity Precious Metals 3.11 Energy Limited Partnership -19.78 Long Government 1.81 Equity Energy -9.75 Foreign Small/Mid Growth 1.64 Natural Resources -6.96 Bear Market 1.64 Commodities Broad Basket -5.11 Japan Stock 1.56 Latin America Stock -4.56 Source: Morningstar 3 Funds Beating the 4-week Gloom Remember it is always not true that fund inflows or outflows will decide the performance of the funds. In certain cases, there is more arts than science. Fund flows may be just a fraction of a factor to help a fund’s uptrend. Inflows may not translate into gains for mutual funds. Investors do not necessarily have to buy funds that are seeing strong inflows and vice versa. However, amid the declining trend in broader markets, it is often tough for individual funds to outperform. So those managing gains even in a tough environment are worth the appreciation. Below we highlight 3 funds that have thrived, each from the best three performing fund categories, over the trailing 4 weeks. These funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on its likely future success. Equity Precious Metals American Century Quantitative Equity Funds Global Gold Fund A (MUTF: ACGGX ) seeks total return that is consistent with investments in companies related to mining, processing, fabricating or distributing gold or other precious metals across the world. ACGGX has gained 5.8% over the past 4 weeks. ACGGX carries a Zacks Mutual Fund Rank #2. However, ACGGX has lost 21.2% and 22.6% over year to date and the last 1 year, respectively. Annual expense ratio of 0.92% is lower than the category average of 1.43%. Long Government Vanguard Long-Term Treasury Fund Inv (MUTF: VUSTX ) invests a major portion of its assets in long-term bonds whose interest and principal payments are backed by the full faith and credit of the U.S. government. At least 65% of VUSTX’s assets will always be invested in U.S. Treasury securities. VUSTX has gained 2.3% over the past 4 weeks. VUSTX carries a Zacks Mutual Fund Rank #1. However, VUSTX has lost 0.8% year to date and gained just 2.9% over the last 1 year, respectively. Annual expense ratio of 0.20% is lower than the category average of 0.62%. Foreign Small/Mid Growth Oberweis International Opportunities Fund (MUTF: OBIOX ) seeks to maximize capital gains over the long term. Most of its assets are invested in companies located outside the U.S. OBIOX has gained 2.9% over the past 4 weeks. OBIOX carries a Zacks Mutual Fund Rank #1. OBIOX has jumped 14.7% year to date and gained 13.8% over the last 1-year period. The 3- and 5-year annualized returns are respectively 20.1% and 14.7%. Annual expense ratio of 1.60% is higher than the category average of 1.53%. Original Post

Cheap Funds Dupe Investors – Q4 2015

Summary Comparison of AUM in funds with attractive holdings versus attractive costs. Distribution of ETFs and mutual funds by Predictive Rating and our two component ratings. Commentary on the shortcomings of traditional ETF and mutual fund research. Fund holdings affect fund performance more than fees or past performance. A cheap fund is not necessarily a good fund. A fund that has done well in the past is not likely to do well in the future ( e.g. 5-star kiss of death and active management has long history of underperformance ). Yet, traditional fund research focuses only on low fees and past performance. Our research on holdings enables investors to find funds with high quality holdings – AND – low fees. Investors are good at picking cheap funds. We want them to be better at picking funds with good stocks. Both are required to maximize success. We make this easy with our predictive fund ratings. A fund’s predictive rating is based on its holdings, its total costs, and how it ranks when compared to the rest of the 6700+ ETFs and mutual funds we cover. Figure 1 shows that 69% of fund assets are in ETFs and mutual funds with low costs but only 1% of assets are in ETFs and mutual funds with Attractive holdings. This discrepancy is astounding. Figure 1: Allocation of Fund Assets By Holdings Quality and By Costs Sources: New Constructs, LLC and company filings Two key shortcomings in the ETF and mutual fund industry cause this large discrepancy: A lack of research into the quality of holdings. A lack of high-quality holdings or good stocks. With about twice as many funds as stocks in the market, there simply are not enough good stocks to fill all the funds. These shortcomings are related. If investors had more insight into the quality of funds’ holdings, I think they would allocate a lot less money to funds with poor quality holdings. Many funds would cease to exist. Investors deserve research on the quality of stocks held by ETFs and mutual funds. Quality of holdings is the single most important factor in determining an ETF or mutual fund’s future performance. No matter how low the costs, if the ETF or mutual fund holds bad stocks, performance will be poor. Costs are easier to find but research on the quality of holdings is almost non-existent. Figure 2 shows investors are not putting enough money into ETFs and mutual funds with high-quality holdings. Only 94 out of 6706 (1% of assets) ETFs and mutual funds allocate a significant amount of value to quality holdings. 99% of assets are in funds that do not justify their costs and over charge investors for poor portfolio management. Figure 2: Distribution of ETFs & Mutual Funds (Count & Assets) By Portfolio Management Rating (click to enlarge) Source: New Constructs, LLC and company filings Figure 3 shows that investors successfully find low-cost funds. 69% of assets are held in ETFs and mutual funds that have Attractive-or-better rated total annual costs , our apples-to-apples measure of the all-in cost of investing in any given fund. Out of the 6706 ETFs and mutual funds we cover, 1524 (69% of assets) earn an Attractive-or-better Total Annual Costs rating. Clearly, ETF and mutual fund investors are smart shoppers when it comes to finding cheap investments. But cheap is not necessarily good. The PowerShares S&P SmallCap Utilities Portfolio ETF (NASDAQ: PSCU ) gets an overall predictive rating of Very Dangerous because no matter how low its fees (0.32%), we expect it to underperform because it holds too many Dangerous-or-worse rated stocks. Low fees cannot boost fund performance. Only good stocks can boost performance. Figure 3: Distribution of ETFs & Mutual Funds (Count & Assets) By Total Annual Costs Ratings (click to enlarge) Source: New Constructs, LLC and company filings Investors should allocate their capital to funds with both high-quality holdings and low costs because those are the funds that offer investors the best performance potential. But they do not. Not even close. Figure 4 shows that less than half (49%) of ETF and mutual fund assets are allocated to funds with low costs and high-quality holdings according to our Predictive Fund Ratings, which are based on the quality of holdings and the all-in costs to investors. Figure 4: Distribution of ETFs & Mutual Funds (Count & Assets) By Predictive Ratings (click to enlarge) Source: New Constructs, LLC and company filings Investors deserve forward-looking ETF and mutual fund research that assesses both costs and quality of holdings. For example, the PowerShares KBW Property & Casualty Insurance Portfolio ETF (NYSEARCA: KBWP ) has both low costs and quality holdings. Why is the most popular fund rating system based on backward-looking past performance? We do not know, but we do know that the transparency into the quality of portfolio management provides cover for the ETF and mutual fund industry to continue to over charge investors for poor portfolio management. How else could they get away with selling so many Dangerous-or-worse rated ETFs and mutual funds? John Bogle is correct – investors should not pay high fees for active portfolio management. His index funds have provided investors with many low-cost alternatives to actively managed funds. However, by focusing entirely on costs, he overlooks the primary driver of fund performance: the stocks held by funds. Investors also need to beware certain Index Label Myths . Research on the quality of portfolio management of funds empowers investors to make better investment decisions. Investors should no longer pay for poor portfolio management. Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, sector or theme.