The concept of mutual fund investment, showing by hand putting coins in a piggy bank … [+]
Question: Why are there so many mutual funds?
Answer: Mutual fund management is profitable, so it creates more products that sell on Wall Street.
A large number of mutual funds has nothing to do with serving your interests as an investor. I’ll use my company’s proprietary information to identify two red flags you can use to avoid bad mutual funds:
1. High fees
Mutual funds should be cheap, but not all. The first step is to consider what cheap means.
To ensure you’re paying at or below average fees, invest only in mutual funds with total annual expenses below 1.62% — the average total annual expense of the 5,933 US equity-style mutual funds my company covers. The weighted average is low at 0.90%, which shows how investors keep their money in mutual funds with low fees.
Figure 1 shows that the DSS AmericaFirst Monthly Risk-On Risk-Off Fund (ABRFX) is the most expensive style mutual fund and the Vanguard 500 Index Fund (VFFSX) is the most expensive. American Growth Fund offers three of the most expensive mutual funds, while Vanguard and Fidelity mutual funds are among the cheapest.
Figure 1: 5 Most and Most Expensive Style Mutual Funds
At least the most expensive style MFs 4Q22
Investors should not pay high premiums for quality holdings. The Vanguard 500 Index Fund (VFFSX) is the best-rated style mutual fund in Figure 1. VFFFSX’s neutral portfolio management rating and 0.02% total annual expense earn it an attractive rating. Ariel Global Fund (AGLYX) is an overall best-rated style mutual fund. AGLYX’s very attractive portfolio management rating and 1.04% total annual expense also make it a very attractive rating.
2. Weak Holdings
The hardest part of getting rid of bad mutual funds is getting rid of bad holdings, but it’s also important because mutual fund performance depends more on its content than its price. Figure 2 shows the mutual funds in each style with worst holdings or portfolio management levels.
Figure 2: Style Mutual Funds with Worst Holdings
Worst style MFs 4Q22
North Square Advisor Research Small Cap Value Fund ( ADVGX ) is the worst-rated mutual fund in Figure 2 based on my overall forecast rating. Yorktown Capital Appreciation Fund (APIGX), Touchstone Sands Capital Select Growth Fund (TSNRX), Clarkston Founders Fund (CFMDX), Spyglass Growth Fund (SPYGX), Neuberger Berman Mid Cap Intrinsic Value Fund (NBMRX), Small Cap ProFund (SLPIX) , Baillie Gifford US Discovery Fund ( BGUKX ), Pinnacle Value Fund ( PVFIX ), and SEI Institutional Multi-Asset Capital Stability Fund ( SMLYX ) also receive an Unattractive Outlook Overall rating, meaning they’re not just weak stocks, they charge high fees. Total annual expenses.
The danger in
Buying a mutual fund without examining its holdings is like buying a stock without examining its business model and financials. In other words, research on mutual fund holdings is important because mutual fund performance is only as good as its holdings.
Performance of Mutual Fund Holdings – Fees
EES
Disclosure: David Coach, Italo Mendonca, Kyle Guske II and Matt Shuler receive no compensation for writing about any particular stock, style or theme.