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 167 different Real Estate mutual funds and at least 648 mutual funds across eleven sectors. Do investors need 58+ choices on average per sector? How different can the mutual funds be?
Those 167 Real Estate mutual funds are very different from each other. With anywhere from 24 to 158 holdings, many of these Real Estate mutual funds have drastically different portfolios with differing risk profiles and performance outlooks.
The same is true for the mutual funds in any other sector, as each offers a very different mix of good and bad stocks. Energy ranks first for stock selection. Utilities ranks last.
Avoiding Analysis Paralysis
I think the large number of sector 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 158 stocks or more for one mutual fund.
Figure 1 shows the top rated mutual fund for each sector.
Figure 1: The Best Mutual Fund in Each Sector
* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity
Amongst the mutual funds in Figure 1, Vanguard Financials Index Fund (VFAIX) ranks first overall, Fidelity Advisor Energy Fund (FIKAX) ranks second, and Schwab Health Care Fund (SWHFX) ranks third. Fidelity Telecom & Utilities Fund (FIUIX) 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. 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
Vanguard Financials Index Fund (VFAIX) is not only the top-rated Financials mutual fund, but is also one of the top-ranked sector mutual funds out of the 648 sector mutual funds that my firm covers.
The worst mutual fund in Figure 1 is Fidelity Telecom & Utilities Fund (FIUIX), which gets an Unattractive rating. One would think mutual fund providers could do better for this sector.
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