How To Find The Best Style Mutual Funds 4Q22

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 979 different All Cap Value mutual funds and at least 6,025 mutual funds across twelve styles. Do investors need 502+ choices on average per style? How different can the mutual funds be?

Those 979 All Cap Value mutual funds are very different from one another. With anywhere from 16 to 862 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 distinct 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 causing them to miss profitable opportunities. Analyzing mutual funds properly 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 862 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, Ariel Global Fund (AGLYX) ranks first overall, Royce Small Cap Special Equity Fund (RSEIX) ranks second, and Steward International Enhanced Index Fund (SNTFX) ranks third. Virtus KAR Small Mid Cap Core Fund (VKSRX) ranks last.

How to Avoid “The Danger Within”

Why do you need to know the holdings of mutual funds before you buy?

A mutual fund is nothing more than the sum of its component parts – if you don’t understand what it’s made of, you ultimately won’t understand what you’re buying. It would be 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.

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

If Only Investors Could Find Funds Rated by Their Holdings

Ariel Global Fund (AGLYX) is not only the top-rated All Cap Value mutual fund but is also the overall top ranked style mutual fund out of the 6,025 style mutual funds that my firm covers.

The worst mutual fund in Figure 1 is Virtus KAR Small Mid Cap Core Fund (VKSRX), which still gets an Attractive rating.

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