Best And Worst Funds: All-Cap Blend

Includes: VTI
by: David Trainer

The All-Cap-Blend invest­ment style ranks sec­ond out of the 12 invest­ment styles. It gets my Neu­tral rat­ing, which is based on aggre­ga­tion of fund rat­ings of all 661 funds in the style. Arti­cles on all style and sec­tor funds are here.

Per Fig­ure 1, there are 496 out of the 2,828 stocks (over 26% of the mar­ket cap) held by large-cap-blend funds that get an Attractive-or-better rat­ing. How­ever, only 7 out of 661 funds (less than 0.2% of total net asses) in the style get an Attractive-or-better rating.

As detailed in "Cheap Funds Dupe Investors", the fund indus­try offers many cheap funds but very few funds with high-quality stocks, or what I call good port­fo­lio man­age­ment. Over 95% of all style funds get low port­fo­lio man­age­ment rat­ings and do not jus­tify their costs.

Investors can­not assume that cheap funds are good invest­ments. Research on the under­ly­ing hold­ings of a fund is nec­es­sary for an informed decision.

Fig­ure 1: All Cap Blend Style Land­scape For Funds & Stocks

Charts Source: New Con­structs, LLC and com­pany filings

There are 661 funds to chose from within the All-Cap-Blend style, and they are all very dif­fer­ent. Per Fig­ure 2, the num­ber of hold­ing varies widely (from 10 to 3311), which cre­ates dras­ti­cally dif­fer­ent invest­ment impli­ca­tions and rat­ings.

How do investors pick the right fund out of the sea of choices that will deliver the best returns?

Fig­ure 2: Funds with Most & Least Hold­ings - Top 5

To iden­tify the best funds within a given cat­e­gory, investors need a pre­dic­tive rat­ing based on analy­sis of the under­ly­ing qual­ity of stocks in each fund. See Figure 3.

My pre­dic­tive fund rat­ings are based on aggre­gat­ing (1) my stock rat­ings on each of the fund's hold­ings and (2) all of the fund's expenses. Investors should not rely on backward-looking research of past per­for­mance for invest­ment decisions.

Fig­ure 3 shows the five best and worst-rated funds for the style. The best funds allo­cate more value to Attractive-or-better-rated stocks than the worst funds and vice versa. The worst funds have high total annual costs and hold poor stocks. My rat­ings (updated daily) on all funds in this style are here.

Fig­ure 3: Funds with the Best & Worst Rat­ings - Top 5

* MF des­ig­nates Mutual Funds and ETF des­ig­nates Exchange-Traded Funds

My top-rated All-Cap-Blend fund is Hen­nessy Funds Trust: Hen­nessy Cor­ner­stone Large Growth Fund (HILGX). One of its largest hold­ings and part of the 73% it allo­cates to Attractive-or-better stocks is Humana (NYSE:HUM). I am bull­ish on the healthcare sec­tor and HUM is one of the best stocks in that sec­tor. An ROIC of 12% is excel­lent for a hos­pi­tal yet the val­u­a­tion of the stock does not seem to care. After its recent drop to ~$86.17, the stock's val­u­a­tion implies the company's after-tax cash flow (NOPAT) will per­ma­nently decline by over 10%. That is the kind of risk/reward I like.

My worst-rated All-Cap-Blend Fund is Rydex Series Funds: Rus­sell 2000 1.5x Strat­egy Fund (MUTF:RYAKX) One of its largest hold­ings and part of the 52% it allo­cates to Dangerous-or-worse stocks is Suc­cess­Fac­tors Inc. (NYSE:SFSF), which gets my Dan­ger­ous rat­ing. SFSF's ROIC is neg­a­tive so the com­pany is bleed­ing cash. Equity investors should take note that as the busi­ness drains its cash reserves, man­age­ment is promis­ing chunks of this pre­cious asset to lessors. Investors should also note that the company's bal­ance sheet is mis­lead­ing. It does not show the $15 mil­lion of oper­at­ing lease oblig­a­tions that the com­pany is allowed to hide off-balance sheet. Though $15 mil­lion is a rel­a­tively small num­ber, the direc­tion taken in management's approach to its reported finan­cials is not encouraging.

Lastly, the stock's val­u­a­tion seems way too high to me. At about $40/share, the cur­rent price implies the com­pany will grow its prof­its at over 40% com­pounded annu­ally for at least 10 years. That is set­ting a rather high hur­dle for a man­age­ment team that appears focused on man­ag­ing account­ing earn­ings instead of eco­nomic earn­ings.

Investors need to tread care­fully when con­sid­er­ing All-Cap-Blend funds, as most are not worth buy­ing. Only 7 of the 661 funds for the style allo­cate enough value to Attractive-or-better-rated stocks to earn an Attrac­tive rat­ing. Fig­ure 3 shows the rat­ing land­scape of all ETFs and mutual funds in the All-Cap-Blend style.

Our style roadmap report ranks all styles and high­lights those that offer the best investments.

Fig­ure 4: Sep­a­rat­ing the Best Funds From the Worst

Fig­ure 5 lists our Pre­dic­tive Fund Rat­ing for the 5 largest and most pop­u­lar All-Cap-Blend funds.

Fig­ure 5: Five Largest All Cap Blend Funds

* MF des­ig­nates Mutual Funds and ETF des­ig­nates Exchange-Traded Funds

* Analy­sis uses the top-ranked class for each fund

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.