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How To Find The Best Style Mutual Funds: Q3’15

Summary The large number of mutual funds hurts investors more than it helps as too many options become paralyzing. Performance of a mutual funds holdings are equal to the performance of a mutual fund. Our coverage of mutual funds leverages the diligence we do on each stock by rating mutual funds based on the aggregated ratings of their holdings. 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 871 different Large Cap Blend mutual funds and at least 5971 mutual funds across twelve styles. Do investors need 500+ choices on average per style? How different can the mutual funds be? Those 871 Large Cap Blend mutual funds are very different. With anywhere from 18 to 1347 holdings, many of these Large Cap Blend mutual funds have drastically different portfolios, creating drastically different investment implications. The same is true for the mutual funds in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Blend ranks last. Details on the Best & Worst mutual funds in each style are here . A Recipe for Paralysis By Analysis We firmly believe mutual funds for a given style should not all be that different. We think the large number of Large Cap Blend (or any other) style 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, that can be as many as 1347 stocks, and sometimes even more, for one mutual fund. Any investor worth his salt 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 style. Figure 1: The Best Mutual Fund in Each Style (click to enlarge) 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 our word for it, see what Barron’s says on this matter. PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND If Only Investors Could Find Funds Rated by Their Holdings… The Calvert Large Cap Core Portfolio (MUTF: CMIIX ) is the top-rated Large Cap Blend mutual fund and the overall best fund of the 5971 style mutual funds that we cover. The worst mutual fund in Figure 1 is the Harbor Funds Mid Cap Value Fund (MUTF: HAMVX ) which gets a Neutral rating. One would think mutual fund providers could do better for this style. Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, style, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Stocks Are Like Hamburgers: Be Bullish When Prices Go Down

Companies that buy back shares favor declines. So do bargain-hunters like Warren Buffett. Sellers should prefer price increases. The recent stock market decline was certainly disheartening for many investors, such as those needing to sell positions in order to fund retirement living expenses. Others, especially those building up a portfolio, or companies buying back shares, and with an eye out for the long term, reacted more gleefully. Why is it bad for some, and good for others, when the market goes south occasionally? Part of the answer can be gleaned from a 1997 letter written by Berkshire Hathaway ( BRK.A , BRK.B ) Chairman Warren Buffett: But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have increased for the ‘hamburgers’ they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices. Buffett roots for stocks to fall when he, or the company, is buying. The Oracle of Omaha owns a $12B chunk of International Business Machines (NYSE: IBM ), a company with a long history of buying back its own stock, which among other things makes the remaining shares more valuable. And occasionally he will add to his own holdings when he feels the time is right. Recently Berkshire increased its position in Phillips 66 (NYSE: PSX ). IBM is blue The Armonk, N.Y.-based IBM reduced its share count by 10% over the last two years, and by a fifth over the past half decade. However, by its own admission Big Blue is in a funk and has been unable to grow revenue and net income over the past few years. The company has been able to boost EPS only through the use of buybacks and other financial moves. The stock has dropped by 20% over the last two years. Management, led by CEO Virginia Rometty, is trying to right the ship and reinvent itself like it did after getting out of the PC business years ago. Today it is making bets in the fast growing cloud computing industry and with Big Data technology. IBM created a separate division for its Watson supercomputer and the Jeopardy! game show champion has found applications in the healthcare industry. In another potential lucrative move the company recently hooked-up with Apple, Inc. (NASDAQ: AAPL ) in a deal in which IBM will sell Apple products to its corporate clients. An investment in IBM could pay off for patient shareholders, like Buffett, willing to hold on for a long period of time. Indirectly, Berkshire investors can also expect a nice return. No oil shock here Not all of the players in the oil patch are in trouble. One niche, the refinery industry, has not been affected as much as the upstream and midstream segments of the business. And as the U.S. economy continues to improve demand for gasoline, diesel, and other refined fuels will probably increase and provide an opportunity for growth going forward. Phillips 66 is positioned well to benefit from the trends. Berkshire took advantage of a slight drop in Phillips 66 stock over the past year and increased its position to about $5B, including two purchases totaling about 3M shares over the past 10 days. After the recent, albeit small, pullback and with a price to book of 2.0, shares are reasonably priced at about 12x forward earnings estimates. A yield of 2.6% and payout ratio less than 30% might be attractive to investors needing a bit of extra income. Other financials, such as a debt to equity ratio of 39%, indicate that things are going well at Phillips. All things considered this might be a good entry point for any investor, not just Buffett. Conclusion Stocks are like hamburgers. Whether it is a company like International Business Machines wanting to reduce share count or an investor like Warren Buffett on the prowl for solid companies like Phillips 66 buying makes more sense at lower prices. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.