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The mid-cap blend style ranks eighth 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 304 mid-cap blend funds as of Feb 13th 2012. Arti­cles on all style and sec­tor funds are here.

Fig­ure 1 shows that 2,052 out of the 2,498 stocks (over 78% of the mar­ket cap) held by mid-cap blend funds get my Neutral-or-worse rat­ing. This high­lights poor stock selec­tion and is why only one mid-cap blend fund is wor­thy of invest­ment. The remain­ing 303 funds (over 99% of total net assets) earn my Neutral-or-worse rat­ing and should be avoided. The take­away is: fund man­agers allo­cate too much cap­i­tal to low-quality stocks.

Investors seek­ing expo­sure to mid-cap blend 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 Blend Style Land­scape For Funds & Stocks


Sources: New Con­structs, LLC and com­pany filings

The 304 mid-cap blend funds are very dif­fer­ent. Per Fig­ure 2, the num­ber of hold­ing varies widely (from 22 to 3069), which cre­ates dras­ti­cally dif­fer­ent invest­ment impli­ca­tions and rat­ings. Review my full list of rat­ings along with free reports on all 304 mid-cap blend 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 stocks offer poor port­fo­lio man­age­ment and high total annual costs. My rat­ings and reports 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 blend fund is Intre­pid Cap­i­tal Man­age­ment Funds Trust: Intre­pid All Cap Fund (ICMCX), which gets my Attrac­tive rat­ing. One of its largest hold­ings and part of the 37% allo­cated to Attractive-or-better stocks is Mol­son Coors Brew­ing Com­pany (TAP), which gets my Attrac­tive rat­ing. If there was ever a defen­sive busi­ness, I think it is sell­ing alco­hol. Peo­ple like to drink when times are good, and they drink more when times are bad. The Mol­son and Coors brands are focused pri­mar­ily at the lower end of the price spec­trum; so they are likely to see mar­ket share gains as peo­ple look to get more beer out a shrink­ing bud­get for dis­cre­tionary purchases.

The stock price tells a very dif­fer­ent and much more somber story. At ~$43.17/share, the cur­rent val­u­a­tion implies the company's after-tax cash flow (NOPAT) will per­ma­nently decline by over 20%. In other words, if the company's NOPAT just stays flat for­ever, the stock is worth over $55. I'll drink to that.

My worst-rated mid-cap blend fund is Pacific Advi­sors Fund Inc: Mid Cap Value Fund (PAMVX), which gets my Very Dan­ger­ous rat­ing. One of its largest hold­ings and part of the 47% allo­cated to Dangerous-or-worse stocks is Gene­see & Wyoming, Inc. (GWR), which gets my Very Dan­ger­ous rat­ing. One of February's Most Dan­ger­ous stocks, GWR has both mis­lead­ing earn­ings and an expen­sive val­u­a­tion. The company's earn­ings are mis­lead­ing because in its lat­est 10-K (for 2010), the com­pany reported ris­ing and pos­i­tive account­ing earn­ings while my model showed eco­nomic earn­ings as neg­a­tive and declin­ing. As soon as the com­pany releases its 2011 10-K, we will know if that trend con­tin­ues. If so, investors should avoid the stock as its val­u­a­tion is also dan­ger­ously high.

At ~$60/share, the cur­rent val­u­a­tion implies the com­pany will grow NOPAT organ­i­cally at over 11% com­pounded annu­ally for 40 years. It is hard to see any rail­road firm grow­ing much faster than GDP for very long, espe­cially with­out mak­ing acqui­si­tions. This stock has had a good run, and I think it is at the end of the line.

Investors need to tread care­fully when con­sid­er­ing mid-cap blend funds, as over 99% are not worth buy­ing. Only 1 of the 304 mid-cap blend funds allo­cates enough value to Attractive-or-better-rated stocks to earn an Attrac­tive rat­ing. Fig­ure 4 shows the rat­ing land­scape of all mid-cap blend 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 blend funds.

Fig­ure 5: Five Largest Mid-cap Blend 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 304 mid-cap blend funds.

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