How To Find The Best Style Mutual Funds 1Q23

With an ever-growing list of similar-sounding mutual funds to choose from, finding the best is an increasingly difficult task. How can investors change the game to shift the odds in their favor?

Don’t Trust Mutual Fund Labels

There are at least 886 different All Cap Value mutual funds and at least 5,439 mutual funds across twelve styles. Do investors need 453+ choices on average per style? How different can the mutual funds be?

Those 886 All Cap Value mutual funds are very different. With anywhere from 16 to 937 holdings, many of these All Cap Value mutual funds have drastically different portfolios with differing risk profiles and performance outlooks.

The same is true for the mutual funds in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Growth ranks last.

Avoiding Analysis Paralysis

I think the large number of style mutual funds hurts investors more than it helps. Manually conducting a deep analysis for every fund is simply not a realistic option, exposing investors to insufficient analysis and missing profitable opportunities. Analyzing mutual funds, 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, there can be as many as 937 stocks or more for one mutual fund.

Figure 1 shows the top-rated mutual fund for each style.

Figure 1: The Best Mutual Fund in Each Style

* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity

Amongst the mutual funds in Figure 1, Royce Small Cap Special Equity Fund (RSEIX) ranks first overall, Deutsche DWS CROCI U.S. Fund (DCURX) ranks second, and Hennessy Cornerstone Large Growth Fund (HILGX) ranks third. Hodges Fund (HDPMX) ranks last.

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. If it holds bad stocks, the mutual fund’s performance will be poor no matter how cheap the fund is.

PERFORMANCE OF FUND’S HOLDINGS – FEES = PERFORMANCE OF FUND

If Only Investors Could Find Funds Rated by Their Holdings

Royce Small Cap Special Equity Fund (RSEIX) is not only the top-rated Small Cap Blend mutual fund but is also the overall top-ranked style mutual fund out of the 5,439 style mutual funds that my firm covers.

The worst mutual fund in Figure 1 is Hodges Fund (HDPMX), which still gets an Attractive rating.

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