How To Find The Best Sector Mutual Funds 2Q16 by Kyle Guske II, New Constructs
Finding the best sector 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 240 different Financials mutual funds and at least 643 mutual funds across ten sectors. Do investors need 63+ choices on average per sector? How different can the mutual funds be?
Dan Loeb's Third Point returned 11% in its flagship Offshore Fund and 13.2% in its Ultra Fund for the first quarter. For April, the Offshore Fund was up 1.7%, while the Ultra Fund gained 2.3%. The S&P 500 was up 6.2% for the first quarter, while the MSCI World Index gained 5%. Q1 2021 hedge Read More
Those 643 Financials mutual funds are very different. With anywhere from 21 to 560 holdings, many of these Financials mutual funds have drastically different portfolios, creating drastically different investment implications.
The same is true for the mutual funds in any other sector, as each offers a very different mix of good and bad stocks. Industrials rank first for stock selection. Energy ranks last. Details on the Best & Worst mutual funds in each sector are here.
Paralysis By Analysis
We think the large number of Financials (or any other) sector 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 643 stocks, and sometimes even more, for one mutual fund.
Any investor focused on fulfilling fiduciary duties 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 sector.
Figure 1: The Best Mutual Fund in Each Sector
Sources: New Constructs, LLC and company filings
Amongst the funds in Figure 1, Fidelity Select Communications Equipment Portfolio (FSDCX) ranks first overall, Vanguard Consumer Staples Index Fund (VCSAX) ranks second, and ICON Industrials Fund (ICTRX) ranks third. MainStay Cushing Renaissance Advantage Fund (CRZZX) 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. Don’t just take my 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…
Our mutual fund ratings leverage our stock coverage. We rate mutual funds based on the aggregated ratings of the stocks each mutual fund holds.
Fidelity Select Communications Equipment Portfolio (FSDCX) is the top-rated Information Technology mutual fund and the overall best fund of the 643 sector mutual funds that we cover.
The worst mutual fund in Figure 1 is MainStay Cushing Renaissance Advantage Fund (CRZZX), which gets a Neutral rating. One would think mutual fund providers could do better for this sector.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector, or theme.