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The Best And Worst Of February: Long/Short Equity

Long/short equity mutual funds and ETFs suffered another month of losses in February, falling 0.33% in the aggregate versus a drop in the S&P 500 Index of 0.13%. Of the universe of 179 funds with a full month of performance in February, only 65 managed to post monthly gains, but there were some particularly strong standouts. Nevertheless, the category saw total outflows of $399 million over the month and more than $3.9 billion for the year ending February 29, 2015. Will long/short equity funds be able to rebound and stem the outflows, or will the category continue to lose assets in March? Time will tell. Best Performers in February The three best-performing long/short equity funds in February were: QuantShares Hedged Dividend Income Fund (NYSEARCA: DIVA ) Gotham Absolute 500 Fund (MUTF: GFIVX ) Gotham Total Return Fund (MUTF: GTRFX ) The 1-year old QuantShares fund, with $3.6 million in assets, was February’s top performer, returning an astounding 9.26% for the month. For the year ending February 29, however, the fund was down 1.97%, but this was surprisingly good enough to rank in the top decile of the category. The fund’s one-year beta, relative to the S&P 500, was 0.45, but its alpha of -0.21% resulted in a Sharpe ratio of -0.35. Still, given the category’s substandard performance overall, investors invested a net $1.23 million in the fund for the year ending on Leap Day. Gotham’s pair of funds – GFIVX and GTRFX – ranked #2 and 3, respectively. The former returned +5.66% in February, giving it one-year returns of -2.83% through the end of the month, handily beating the S&P 500 Index, which fell 6.19% over the same period; while the latter returned +5.08% for the month, and didn’t have one-year returns since it launched on March 31, 2015. GFIVX, the more mature fund, had a 0.72 beta, alpha of 1.77% and volatility of 11.55% for the year ending February 29. This resulted in a one-year Sharpe ratio of -0.20, compared to that of the Index of -0.45. Worst Performers in February The three worst-performing long/short equity funds in February were: Neuberger Berman Global Long Short Fund (MUTF: NGBAX ) Catalyst Insider Long/Short Fund (MUTF: CIAAX ) Caldwell & Orkin Market Opportunity Fund (MUTF: COAGX ) The Neuberger Berman Global Long Short Fund was February’s worst-performing long/short equity fund, losing a stunning 8.59% for the month. This dropped its one-year return to -14.46% through the end of February, ranking in the bottom 10% of its category. Surprisingly, the fund enjoyed positive net flows for the year ending February 29, with investors putting $4.1 million more into the fund than they withdrew. Perhaps they’re attracted to the fund’s -0.06 beta coefficient, which is about as close to “uncorrelated” as you can get. But with a -15.40% one-year alpha, the fund’s low correlation hasn’t helped its investors much. The Catalyst Insider Long/Short Fund suffered monthly losses of 5.62% in February, which brought its one-year return through the end of the month to -3.21%. This was good enough to rank in the top quarter of the category, but not good enough to convince investors to stick with the fund – it suffered outflows of more than $7 million for the year. Perhaps investors looked past its attractive 1.47% alpha to its 17.33% annualized volatility, which ranked fourth out of the category’s 142 funds with one-year track records. Finally, the Caldwell & Orkin fund was the month’s third-worst performer with losses of 4.88%, but the fund ranked in the top 7% of its category based on its one-year returns of +1.38%. This was undoubtedly one of the reasons it received a whopping $87.47 million in net inflows for the year. Its one-year beta (-0.07), alpha (+1.26%), Sharpe ratio (0.19), and volatility (8.75%) were all attractive relative to the category averages, too. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article. MPT statistics (alpha and beta) are relative to the S&P 500 Index.

4 Top-Rated Small-Cap Blend Mutual Funds To Invest In

Investors looking to invest in a portfolio that provides significant exposure to both value and growth stocks, and wanting to diversify their investments across a wide range of sectors and companies, may consider small-cap blend mutual funds. Blend funds or “hybrid funds” owe their origin to a graphical representation of a fund’s equity style box and aim for value appreciation by capital gains. Meanwhile, small-cap companies are believed to be less affected by a global downturn, thanks to limited international exposure. Though funds investing in small-cap stocks are believed to be more volatile than funds with a more large or mid-cap focus, these are expected to have higher growth prospects than their large and medium counterparts. Companies with market capitalization lower than $2 billion are generally considered small-cap firms. Below we will share with you 4 buy-rated small-cap blend mutual funds . Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect these mutual funds to outperform their peers in the future. To view the Zacks Rank and past performance of all small-cap blend mutual funds, investors can click here to see the complete list of funds . Fidelity Stock Selector Small Cap (MUTF: FDSCX ) seeks capital growth by investing its assets across a wide range of sectors. FDSCX invests a major portion of its assets in common stocks of companies having market capitalizations within the universe of the Russell 2000 Index or the S&P SmallCap 600 Index. The Fidelity Stock Selector Small Cap fund has a three-year annualized return of 7.2%. As of October 2015, FDSCX held 207 issues, with 1.75% of its total assets invested in Bank of the Ozarks Inc. SSgA Dynamic Small Cap N (MUTF: SVSCX ) invests a large chunk of its assets in equity securities of companies listed in the Russell 2000 Index. SVSCX may also invest a maximum of 20% of its assets in securities of companies that are not included in the index. The SSgA Dynamic Small Cap N fund has a three-year annualized return of 8.9%. SVSCX has an expense ratio of 1.10% as compared to the category average of 1.24%. JPMorgan U.S. Small Company C (MUTF: JTUCX ) seeks total return. JTUCX invests a large portion of its assets in equity securities of small-cap U.S. companies. These small-cap companies have market capitalization similar to those companies listed in the Russell 2000 Index during the time of purchase. The JPMorgan US Small Company C fund has a three-year annualized return of 7.6%. As of January 2016, JTUCX held 371 issues, with 1.48% of its total assets invested in Take-Two Interactive Software Inc. Vanguard Strategic Small Cap Equity Investor (MUTF: VSTCX ) invests the majority of its assets in small-cap domestic equity securities. VSTCX invests in securities that have strong growth prospects and reasonable valuations compared to their industry peers. VSTCX achieves this balance by applying a quantitative process to evaluate all of the securities in the MSCI US Small Cap 1750 Index. The Vanguard Strategic Small-Cap Equity Investor fund has a three-year annualized return of almost 10%. VSTCX has an expense ratio of 0.34% as compared to the category average of 1.24%. To view the Zacks Rank and past performance of all small-cap blend mutual funds, investors can click here to see the complete list of funds. About Zacks Mutual Fund Rank By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the Zacks Rank. Original Post

Cheap Funds Dupe Investors – Q1 2016

Fund holdings affect fund performance more than fees or past performance. A cheap fund is not necessarily a good fund. A fund that has done well in the past is not likely to do well in the future ( e.g. 5-star kiss of death and active management has long history of underperformance ). Yet, traditional fund research focuses only on low fees and past performance. Our research on holdings enables investors to find funds with high quality holdings – AND – low fees. Investors are good at picking cheap funds. We want them to be better at picking funds with good stocks. Both are required to maximize success. We make this easy with our predictive fund ratings. A fund’s predictive rating is based on its holdings, its total costs, and how it ranks when compared to the rest of the 7000+ ETFs and mutual funds we cover. Figure 1 shows that 70% of fund assets are in ETFs and mutual funds with low costs but only 1% of assets are in ETFs and mutual funds with Attractive holdings. This discrepancy is astounding. Figure 1: Allocation of Fund Assets By Holdings Quality and By Costs Sources: New Constructs, LLC and company filings Two key shortcomings in the ETF and mutual fund industry cause this large discrepancy: A lack of research into the quality of holdings. A lack of high-quality holdings or good stocks. With about twice as many funds as stocks in the market, there simply are not enough good stocks to fill all the funds. These shortcomings are related. If investors had more insight into the quality of funds’ holdings, we think they would allocate a lot less money to funds with poor quality holdings. Many funds would cease to exist. Investors deserve research on the quality of stocks held by ETFs and mutual funds. Quality of holdings is the single most important factor in determining an ETF or mutual fund’s future performance. No matter how low the costs, if the ETF or mutual fund holds bad stocks, performance will be poor. Costs are easier to find but research on the quality of holdings is almost non-existent. Figure 2 shows investors are not putting enough money into ETFs and mutual funds with high-quality holdings. Only 78 out of 7421 (1% of assets) ETFs and mutual funds allocate a significant amount of value to quality holdings. 99% of assets are in funds that do not justify their costs and over charge investors for poor portfolio management. Figure 2: Distribution of ETFs & Mutual Funds (Count & Assets) By Portfolio Management Rating Click to enlarge Source: New Constructs, LLC and company filings Figure 3 shows that Investors successfully find low-cost funds. 70% of assets are held in ETFs and mutual funds that have Attractive-or-better rated total annual costs , our apples-to-apples measure of the all-in cost of investing in any given fund. Out of the 7421 ETFs and mutual funds we cover, 1664 (70%) earn an Attractive-or-better total annual costs rating. Clearly, ETF and mutual funds investors are smart shoppers when it comes to finding cheap investments. But cheap is not necessarily good. The Nationwide Portfolio Completion Fund (MUTF: NAAIX ) gets an overall predictive rating of Very Dangerous because no matter how low its fees (0.62%), we expect it to underperform because it holds too many Dangerous-or-worse rated stocks. Low fees cannot boost fund performance. Only good stocks can boost performance. Figure 3: Distribution of ETFs & Mutual Funds (Count & Assets) By Total Annual Costs Ratings Click to enlarge Source: New Constructs, LLC and company filings Investors should allocate their capital to funds with both high-quality holdings and low costs because those are the funds that offer investors the best performance potential. But they do not. Not even close. Figure 4 shows that less than half (49%) of ETF and mutual fund assets are allocated to funds with low costs and high-quality holdings according to our predictive fund ratings, which are based on the quality of holdings and the all-in costs to investors. Figure 4: Distribution of ETFs & Mutual Funds (Count & Assets) By Predictive Ratings Click to enlarge Source: New Constructs, LLC and company filings Investors deserve forward-looking ETF and mutual fund research that assesses both costs and quality of holdings. For example, the Market Vectors Semiconductor ETF (NYSEARCA: SMH ) has both low costs and quality holdings. Why is the most popular fund rating system based on backward-looking past performance? We do not know, but we do know that the transparency into the quality of portfolio management provides cover for the ETF and mutual fund industry to continue to over charge investors for poor portfolio management. How else could they get away with selling so many Dangerous-or-worse ETFs and mutual funds? John Bogle is correct – investors should not pay high fees for active portfolio management. His index funds have provided investors with many low-cost alternatives to actively managed funds. However, by focusing entirely on costs, he overlooks the primary driver of fund performance: the stocks held by funds. Investors also need to beware certain Index Label Myths . Research on the quality of portfolio management of funds empowers investors to make better investment decisions. Investors should no longer pay for poor portfolio management. D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.