In his article on Fidelity’s Magellan Fund, MarketWatch’s Chuck Jaffe feature’s New Constructs mutual fund rating system, which has a “neutral” rating on the Magellan fund.
Here are the details for Mr. Jaffe’s article:
“Richard Hunt, senior financial analyst for New Constructs, noted that the fund hasn’t just underperformed the index for a decade, but ‘it is in a poor position to turn that record around any time soon. … To illustrate, [Magellan] allocates 24% of its value to stocks that we rate as ‘dangerous’ or ‘very dangerous,’ while the S&P 500 allocates only 18%. Furthermore, the fund charges investors more than six times the expense ratio of … the most popular S&P 500 ETF.
‘It is clear that Magellan offers investors holdings that are more dangerous than the S&P 500’s at a higher price.'”
Central to New Constructs’ fund rating system is comparison to passively-managed benchmarks to focus on whether investors should pay the high price of active management.
Our fund rating system is the same as our stock rating system, which has received many accolades for its predictive power.
Indeed, New Constructs is the first to offer investors mutual fund research with predictive power.
Our exacting bottoms-up analysis of stocks drives equally exacting bottoms-up of funds on a holding-by-holding basis.
Now, investors have research on funds that assess the quality of all the fund’s holdings.
Methodology: Predictive with Strong Track Record
Unlike the other fund rating systems that too often dominate the dialogue on funds, our system is not backward-looking and does not rely on past price performance.
For proof that the backward-looking rating system is becoming obsolete look no farther than one of the biggest fund rating firms in the world. Morningstar recently announced that it was augmenting its entirely backward-looking “star” rating system with an “analyst” rating system that observes expense ratios, manager and sponsor governance and past performance.
This new rating system, according to Morningstar, is expected to add more predictive value to its ratings. More is definitely better in this case since the predictive value of the “star” ratings were perceived across the wealth management industry as very low and often counter-predictive.
Note that the underlying valuation of the stocks held by a fund is not included anywhere in the new “analyst” rating. There is no mention of the underlying profitability (or lack thereof) of the stocks held by the fund either.
Admitting that a backward-looking “star” system was in need of improvement is a step in the right direction, but Morningstar is still far from offering investors the predictive value research they deserve in fund research.
Investors deserve fund research that is rigorous as individual stock research.
For fund research to match the quality of stock research, one must analyze the investment merit of each and every individual stock held by a fund. There is no worthwhile short-cut to this daunting challenge, which has, until now, gone unmet.
Let’s face it: high-quality research on one stock is difficult and rare. The process of translating accounting earnings into economic earnings, by itself, requires a great deal of work for every period of history one covers for a single company.
I am not surprised that no other firms have been able to muster the resources to provide investors with fund research based on rigorous analysis of the underlying holdings for a large number of funds.
Most of the research firms that cover enough stocks to be able to perform fund ratings based on a fund’s underlying holdings are Wall Street firms. And those firms are in the investment banking business, which has proven over time not to share the best interests of the firms’ research clients.
New Constructs ability to cover 3000+ stocks enables us to cover so many funds. Our patented research platform for reversing accounting distortions and discounted cash flow analysis leverages data from the financial footnotes to deliver research of unrivaled quality and accuracy on both stocks and funds.
Currently, we offer reports with predictive ratings for nearly 400 ETFs. We plan to cover several thousand mutual funds in the near future.
To access our reports, enter the ETF or fund ticker on our home page.