QUESTION: Why shouldn’t ETF & fund research be as good as stock research? Why should fund investors rely on backward-looking NAV trends?
ANSWER: They should not.
QUESTION: Why has the traditional, backward-looking fund research dominated the dialogue on funds for so long?
ANSWER: Purveyors of the traditional fund research are extremely good marketers and nothing else has emerged to challenge them.
QUESTION: How exactly should fund research change to be more like stock research?
ANSWER: A fund is only as good as the stocks it holds. To rate a fund, one must research and rate all of its holdings while also accounting for management costs.
There are two drivers of future fund performance:
- Stock-picking (Portfolio Management Rating) and
- Fund expenses (Total Annual Costs Rating)
Our Predictive Overall Fund Rating is based on these drivers.
We analyze every fund holding based on New Constructs’ stock ratings, which are regularly featured as among the best by Barron’s. Next, we measure and rank the all-in costs of investing in a fund (Total Annual Costs Rating).
Our free mutual fund & ETF screener provides ratings and reports on 7400+ funds updated daily.
Figure 1 details the criteria that drive our predictive rating system for funds. The two drivers of our predictive fund rating system are Portfolio Management and Total Annual Costs. The Portfolio Management Rating (details here) is the same as our Stock Rating (details here) except that we incorporate Asset Allocation (details here) in the Portfolio Management Rating. The Total Annual Costs Rating (details here) captures the all-in cost of being in a fund over a 3-yr holding period, the average holding period of all mutual fund investors.
Figure 1 – Predictive Overall Fund Rating Criteria and Thresholds for US Equity Funds
Source: New Constructs, LLC
2 Comments
It’s too bad you guys don’t weigh performance. I checked the best-performing funds against your index, which had them ranked low due to their higher fees.
As an investor, I’m ok with higher fees if the performance warrants it. Your rating model doesn’t seem to account for overperformance.
In fact your top rated funds are actually very poor performers against their peers.
Mike S:
Past performance is no guarantee of future performance. A mutual fund that performed well last year could easily perform poorly this year. I rate funds based on the quality of their holdings, as the holdings are what drive the performance of the fund.
Higher fees are acceptable if the performance warrants it. Several of my Attractive-rated funds have above average fees, but the quality of their holdings outweighs their higher fees. However, my highest rated funds are those that combine high quality holdings with low costs.
Thanks for your comment,
David Trainer