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The mid-cap value style ranks tenth out of the twelve fund styles as detailed in my style roadmap. It gets my Dan­ger­ous rat­ing, which is based on aggre­gation of fund rat­ings of 239 mid-cap value funds as of Feb 14th 2012. Arti­cles on the funds in each sec­tor and style are here.

Fig­ure 1 shows that none of the 239 mid-cap value funds are not worth buy­ing. They all get a Neutral-or-worse rat­ing. The major­ity (198 out of 239) are Dangerous-or-worse. 1831 of the 2252 stocks (over 78% of the mar­ket cap) held by mid-cap value funds earn a Neutral-or-worse rat­ing. The take­away is: fund man­agers allo­cate too much cap­i­tal to low-quality stocks.

Investors seek­ing expo­sure to mid-cap value stocks should buy a bas­ket of Attractive-or-better rated stocks and avoid pay­ing unde­served fund fees. Active man­age­ment has a long his­tory of not pay­ing off.

As detailed in "Cheap Funds Dupe Investors", the fund indus­try offers many cheap funds but very few funds with high-quality stocks, or with what I call good port­fo­lio man­age­ment.

Fig­ure 1: Mid-cap Value Style Land­scape For Funds & Stocks


Sources: New Con­structs, LLC and com­pany filings

The 239 mid-cap value funds are very dif­fer­ent. Per Fig­ure 2, the num­ber of hold­ing varies widely (from 23 to 3106), which cre­ates dras­ti­cally dif­fer­ent invest­ment impli­ca­tions and rat­ings. Review my full list of rat­ings along with free reports on all 239 mid-cap value funds.

How do investors pick the fund that will most likely deliver the best future returns?

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


Sources: New Con­structs, LLC and com­pany filings

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.

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 offer poor port­fo­lio man­age­ment and charge high total annual costs. My rat­ings and reports (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

Sources: New Con­structs, LLC and com­pany filings

My top-rated mid-cap value fund is Old Mutual funds II: Old Mutual TS&W Mid Cap Value Fund (OTMIX), which gets my Neu­tral rat­ing. One of its largest hold­ings and part of the 33% allo­cated to Attractive-or-better stocks is Annaly Cap­i­tal Man­age­ment, Inc. (NYSE:NLY), which gets my Attrac­tive Rat­ing rat­ing. Over­all, I'm bear­ish on the Finan­cials sec­tor, but NLY is a dia­mond in the rough.

With a top-quintile ROIC of 15%, NLY's man­age­ment is one of very few in the Finan­cial sec­tor to allo­cate cap­i­tal effec­tively. At ~$16.56/share the cur­rent stock price implies that the company's after-tax cash flows (NOPAT) will per­ma­nently decrease by 10%. The stock is worth over $29 if the com­pany only man­ages to keep prof­its from declin­ing. Any future profit growth means big upside for this stock.

My worst-rated mid-cap value fund is Pro­Funds: Mid-Cap Value Pro­fund [s: MLPSX], which gets my Very Dan­ger­ous rat­ing. One of its largest hold­ings and part of the 46% allo­cated to Dangerous-or-worse stocks is South­ern Union Com­pany (NYSE:SUG), which gets my Dan­ger­ous rat­ing. I'm bear­ish on the Util­ity sec­tor and SUG exem­pli­fies the poor prof­itabil­ity and excess val­u­a­tions in the sec­tor. The company's ROIC is a dis­ap­point­ing 5% and the com­pany has never, over the 13 years I've mod­eled, earned an ROIC greater than it's weighted aver­age cost of cap­i­tal (WACC).

In spite of SUG's piti­ful past per­for­mance, the company's stock price at ~$43.58/share implies that NOPAT will increase by 10% com­pounded annu­ally for almost 20 years. I think the rate pay­ers (and the reg­u­la­tors) would demand a cut in prices before allow­ing a util­ity to be so profitable.

Investors should steer clear of all mid-cap value funds, as none of the 239 funds are not worth buy­ing. Fig­ure 4 shows the rat­ing land­scape of all mid-cap value ETFs and mutual funds.

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

Fig­ure 4: Sep­a­rat­ing the Best Funds From the Worst Funds


Sources: New Con­structs, LLC and com­pany filings

Fig­ure 5 lists our Pre­dic­tive Fund Rat­ing for the 5 largest and most pop­u­lar mid-cap value funds.

Fig­ure 5: Five Largest Mid-cap Value Funds


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

* Analy­sis uses the top-ranked class for each fund

Sources: New Con­structs, LLC and com­pany filings

Review my full list of rat­ings and rank­ings along with free reports on all 239 mid-cap value funds.

Source: Best And Worst Funds: Mid-Cap Value Style