How To Avoid The Worst Style Mutual Funds 4Q22

Question: Why are there so many mutual funds?

Answer: Mutual fund management is profitable, so Wall Street creates more products to sell.

The large number of mutual funds has little to do with serving your best interests as an investor. I leverage my firm’s proprietary data to identify two red flags you can use to avoid the worst mutual funds:

1. High Fees

Mutual funds should be cheap, but not all of them are. The first step is to benchmark what cheap means.

To ensure you are paying at or below average fees, invest only in mutual funds with total annual costs below 1.62% – the average total annual cost of the 5,933 U.S. equity Style mutual funds my firm covers. The weighted average is lower at 0.90%, which highlights how investors tend to put their money in mutual funds with low fees.

Figure 1 shows DSS AmericaFirst Monthly Risk-On Risk-Off Fund (ABRFX) is the most expensive style mutual fund and Vanguard 500 Index Fund (VFFSX) is the least expensive. American Growth Fund provides three of the most expensive mutual funds while Vanguard and Fidelity mutual funds are among the cheapest.

Figure 1: 5 Most and Least Expensive Style Mutual Funds

Investors need not pay high fees for quality holdings. Vanguard 500 Index Fund (VFFSX) is the best ranked style mutual fund in Figure 1. VFFSX’s neutral Portfolio Management rating and 0.02% total annual cost earns it an attractive rating. Ariel Global Fund (AGLYX) is the best ranked style mutual fund overall. AGLYX’s very attractive Portfolio Management rating and 1.04% total annual cost also earns it a very attractive rating.

2. Poor Holdings

Avoiding poor holdings is by far the hardest part of avoiding bad mutual funds, but it is also the most important because a mutual fund’s performance is determined more by its holdings than its costs. Figure 2 shows the mutual funds within each style with the worst holdings or portfolio management ratings.

Figure 2: Style Mutual Funds with the Worst Holdings

North Square Advisory Research Small Cap Value Fund (ADVGX) is the worst rated mutual fund in Figure 2 based on my predictive overall rating. Yorktown Capital Appreciation Fund (APIGX), Touchstone Sands Capital Select Growth Fund (TSNRX), Clarkston Founders Fund (CFMDX), Spyglass Growth Fund (SPYGX), Neuberger Berman Mid Cap Intrinsic Value Fund (NBMRX), Small Cap ProFund (SLPIX), Baillie Gifford U.S. Discovery Fund (BGUKX), Pinnacle Value Fund (PVFIX), and SEI Institutional Multi-Asset Capital Stability Fund (SMLYX) also earn a very unattractive predictive overall rating, which means not only do they hold poor stocks, they charge high total annual costs.

The Danger Within

Buying a mutual fund without analyzing its holdings is like buying a stock without analyzing its business model and finances. Put another way, research on mutual fund holdings is necessary due diligence because a mutual fund’s performance is only as good as its holdings.

PERFORMANCE OF MUTUAL FUND’s HOLDINGs – FEESEES
= PERFORMANCE OF MUTUAL FUND

Disclosure: David Trainer, Italo Mendonça, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.