How to Find the Best Sector Mutual Funds 2Q17

Finding the best mutual funds is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available?

Don’t Trust Mutual Fund Labels

There are at least 241 different Financials mutual funds and at least 700 mutual funds across ten sectors. Do investors need 70 choices on average per sector? How different can the mutual funds be?

Those 241 Financial sector mutual funds are very different. With anywhere from 23 to 402 holdings, many of these Financials mutual funds have drastically different portfolios, creating drastically different investment implications.

The same is true for the mutual funds in any other sector, as each offers a very different mix of good and bad stocks. Consumer Staples ranks first for stock selection. Energy ranks last. Details on the Best & Worst mutual funds in each sector are here.

Paralysis by Analysis

We think the large number of Financial (or any other) sector mutual funds hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many mutual funds. Analyzing mutual funds, done 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 402 stocks or more for one mutual fund.

Anyone focused on fulfilling the fiduciary duty of care recognizes that analyzing the holdings of a mutual fund is critical to finding the best mutual fund. Figure 1 shows our top rated mutual fund for each sector.

Figure 1: The Best Mutual Fund in Each Sector

Sources: New Constructs, LLC and company filings

Amongst the mutual funds in Figure 1, Vanguard Financials Index (VFAIX) ranks first overall, American Century Utilities (BULIX) ranks second, and Fidelity Select Computers (FDCPX) ranks third. Fidelity Select Energy Services (FSESX) ranks last.Sources:   New Constructs, LLC and company filings

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. Don’t just take my word for it, see what Barron’s says on this matter.

PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND

Analyzing each holding within funds is no small task. Our Robo-Analyst technology enables us to perform this diligence with scale and provide the research needed to fulfill the fiduciary duty of care. More of the biggest names in the financial industry (see At BlackRock, Machines Are Rising Over Managers to Pick Stocks) are now embracing technology to leverage machines in the investment research process. Technology may be the only solution to the dual mandate for research: cut costs and fulfill the fiduciary duty of care. Investors, clients, advisors and analysts deserve the latest in technology to get the diligence required to make prudent investment decisions.

If Only Investors Could Find Funds Rated by Their Holdings…

Our mutual fund ratings leverage our stock coverage. We rate mutual funds based on the aggregated ratings of the stocks each mutual fund holds.

Vanguard Financials Index (VFAIX) is not only the top-rated Financials mutual fund, but is also the overall best sector mutual fund out of the 700 sector mutual funds that we cover.

The worst mutual fund in Figure 1 is Fidelity Select Energy Services (FSESX), which gets a Very Dangerous rating. One would think mutual fund providers could do better for this sector.

This article originally published on May 3, 2017.

Disclosure: David Trainer, Kenneth James and Kyle Guske II receive no compensation to write about any specific stock, sector, or theme.

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