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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 Style Mutual Fund Labels
There are at least 836 different All Cap Value mutual funds and at least 5,348 mutual funds across twelve styles. Do investors need 445 plus choices on average per style? How different can the mutual funds be?
Those 836 All Cap Value mutual funds are very different. With anywhere from 14 to 955 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 different mix of good and bad stocks. All 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 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 955 stocks or more for one mutual fund.
Figure 1 shows my firm’s top rated mutual fund for each style.
Figure 1: The Best Mutual Fund in Each Style
Best Style Mutual Funds 1Q25
* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity
Amongst the mutual funds in Figure 1, Royce Small Cap Special Equity Fund (RSEIX) ranks first overall, Fidelity SAI U.S. Value Index Fund (FSWCX) ranks second, and FullerThaler Behavioral Small Cap Equity Fund (FTHFX) ranks third. Vanguard Mid Cap Growth Fund (VMGRX) 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 Style Mutual Funds Rated by Their Holdings
Royce Small Cap Special Equity Fund (RSEIX) is not only the top-rated Small Cap Value mutual fund, but is also the overall top-ranked style mutual fund out of the 5,348 style mutual funds that my firm covers.
The worst mutual fund in Figure 1 is Vanguard Mid Cap Growth Fund (VMGRX), which gets an Attractive rating.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, sector or theme.