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David Trainer
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Follow me on Twitter: @NewConstructs David is CEO of New Constructs (, an independent research firm that leverages proprietary technology to find key insights from the Financial Footnotes of 10Ks and 10Qs. Having analyzed over 70,000 annual reports and their Financial... More
My company:
New Constructs
My blog:
The Diligence Institute
My book:
The Valuation Handbook
  • How To Find The Best Sector Mutual Funds

    Finding the best mutual funds is an increasingly difficult task as there are more and more to choose from daily.

    You Cannot Trust Mutual Fund Labels

    There are over 150 mutual funds for the Information Technology sector, and at leas 644 mutual funds across all sectors. Do investors really need that many different mutual funds?

    These funds can have a wide variety of holdings, and even more specific labels do not tell investors exactly what is in the fund. Rydex Series Fund: Internet Fund (MUTF:RYINX) and Kinetics Mutual Funds, Inc: Internet Fund (MUTF:KINAX) differ in four out of their top holdings. Google (NASDAQ:GOOG) is the only company that both funds allocate heavily to.

    Mutual funds in any given sector offer a very different mix of good and bad stocks. Some sectors have lots of good stocks and offer lots of good mutual funds. The opposite is true for others. And some sectors lie somewhere in between. For example, the financial sector, per my 1Q Sector Rankings report, ranks last out of the 10 major sectors when it comes to providing investors with quality mutual funds. The consumer staples sector ranks first. Details on the Best & Worst ETFs in each sector are here.

    The Danger Within

    Why do investors need to know the holdings of mutual funds before they buy? They need to know to be sure they do not buy a mutual fund that might blow up. Buying a mutual fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on mutual fund holdings is necessary due diligence because a mutual fund's performance is only as good as its holdings' performance. No matter how cheap, if it holds bad stocks, the mutual fund's performance will be bad.


    Figure 1: Top Rated Mutual Funds By Sector

    (click to enlarge)

    Sources: New Constructs, LLC and company filings

    Only the Consumer Staples and Health Care sectors offer any mutual funds that get a 4 star (Attractive) rating. No sector offers a mutual fund that gets a 4 star rating, has sufficient liquidity (at least $100 million in assets) to be a safe investment, and has a low initial minimum investment.

    Paralysis By Analysis

    The large number of 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. For some funds that can be over 1,000 stocks. To make it more complicated, mutual funds only disclose their holdings each quarter. The reported holdings of a mutual fund may not correspond to its actual holdings two months after the disclosure.

    Any investor, worth his salt, knows that knowing the holdings of a mutual fund is critical to finding the best mutual fund.

    Finding the Sector Mutual Funds with the Best Holdings

    Figure 1 shows my top rated mutual fund for each sector. Importantly, my ratings on mutual funds are based primarily on my stock ratings of their holdings. My coverage of mutual funds leverages the diligence we do on each stock by rating mutual funds based on the aggregated ratings of the stocks each mutual fund holds.

    Vanguard World Funds: Vanguard Consumer Staples Index (MUTF:VCSAX) is my top rated Consumer Staples fund and my overall top rated sector mutual fund. Its $100,000 initial minimum, however, may keep it from being a feasible option for many investors. The $5 million minimum investment for Davis Series Funds: Davis Financial Fund (MUTF:DVFYX) prices out many investors.

    Other top rated mutual funds have a problem with inadequate liquidity. Funds with under $100 million in assets can end up with greater volatility and can have more of a disconnect between the price of the fund and the underlying value of the equities it holds. For this reason, investors should think twice about Oak Associates Funds: Live Oak Health Sciences Fund (MUTF:LOGSX) even though the quality of its holdings gives it a 4 star rating.

    Fidelity Select Portfolios: Computers Portfolio (MUTF:FDCPX) is my top rated mutual fund that meets the liquidity requirement and has a reasonably low minimum investment ($2,500). It earns my 3 star (Neutral) rating.

    You can find more liquid alternatives for the other funds on my free ETF and mutual fund screener.

    Covering All The Bases, Including Costs

    My mutual fund rating also takes into account the total annual costs, which represents the all-in cost of being in the mutual fund. This analysis is much more complicated for mutual funds than ETFs because they charge front- and back-end loads and transaction costs. Just looking at the expense ratio alone is not enough to understand the true costs of being in a fund. For more detail on the ways hidden costs can hurt investors, see Danger Zone 3/4/2013: Wilmington Small Cap Growth Fund (MUTF:ARPAX).

    My ratings penalize those funds with abnormally high costs. However, low costs alone cannot make a good fund, as detailed in Low Cost Funds Dupe Investors.

    Top Stocks Make Up Top Mutual Funds

    Amgen Inc. (NASDAQ:AMGN) is one of my favorite holdings in LOGSX. This stock gets my Very Attractive rating. Amgen has achieved impressively consistent growth in profitability for the past decade and a half, growing after tax profit (NOPAT) by 15% compounded annually since 1998. It has increased economic earnings every year since 2004. The $23 billion in excess cash that the company has on hand also puts it in good position to fund research and support marketing and distribution of its drugs. AMGN's share price increased by over 20% a week ago on news of encouraging test results for is new melanoma drug, but the stock remains significantly undervalued. At its current share price of ~$98.66, AMGN has a price to economic book value ratio of 0.8, implying that the company will experience a permanent 20% decline in NOPAT. Such low market expectations, combined with a strong track record of economic profitability, gives this stock a very attractive risk/reward for investors.

    Sam McBride contributed to this report

    Disclosure: David Trainer and Sam McBride receive no compensation to write about any specific stock, sector, or theme.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Apr 03 11:14 AM | Link | Comment!
  • See How Diligence Paid In 2012

    Everyone wants diligence. The problem is that diligence is expensive. I make diligence cost-effective.

    What do I mean by diligence?

    I mean reading and analyzing the entire 10-Ks* for over 3000 companies over their entire reporting history. 10-Ks contain the most important financial information that companies provide all year. Unlike press releases and 10-Qs, only the 10-Ks contain a complete set of the financial footnotes. And only in these footnotes can one find the full set of data required to assess the true profitability and valuation of stocks.

    From this mountain of data, we will derive proprietary research that delivers some of the best stock picks of any research firm. Just as we did last year: See How Diligence Paid In 2011.

    For example, after reviewing Scripps Networks Interactive (NYSE:SNI) 2011 10-K in March of 2012, I revealed that the company's economic earnings grew faster (up 50%) than its GAAP net income was (up only 1%) for 2011. SNI is up almost 30% since my March 27, 2012 article. For similar reasons, we told clients that Amgen, Inc. (NASDAQ:AMGN) was an attractive investment. AMGN is up almost 40% since April 17, 2012.

    Other examples of how analyzing the complete 10-K for companies enabled me to make strong stock predictions. Note the articles below are just a sample. We provided clients with more.

    Maybe it is time more people started paying attention to 10-Ks, or, at least, to research that focuses on analyzing the financial footnotes in 10-Ks.

    It is not an easy task. My firm, New Constructs, has developed proprietary technology and patented systems around doing it efficiently.

    Our fund research leverages our top-ranked stock picking in our Predictive Fund ratings on 7400+ ETFs and mutual funds. We also offer a free Fund Screener and reports on all 7400+ funds we cover.

    *10-Ks are the official version of the annual report filed with the Securities and Exchange Commission (SEC). These documents are anywhere from 100 to 1000 pages and contain the most important financial data available on publicly-traded companies. No other reports come close to rivaling the amount of relevant information in 10-Ks.

    Sam McBride contributed to this report

    Disclosure: David Trainer owns WNR, CSCO, and WDC. Sam McBride and David Trainer receive no compensation to write about any specific stock, sector, or theme.

    Mar 18 1:47 PM | Link | Comment!
  • 1Q Best & Worst ETFs & Mutual Funds – By Style – Recap

    Each quarter, we provide the most comprehensive review of equity ETFs and mutual funds available. We review the Best & Worst ETFs and Mutual Funds by sector and style. This article provides quick access to all our 1Q reports on Style funds. Access to the 1Q Sector Recap is here.

    We begin the 1Q13 Style series with our Style Rankings report, which details the best styles for finding quality ETFs and mutual funds. Next we highlight the best & worst for each style in the Rating Breakdown By Style report. We follow with detailed reviews of the Best & Worst for each style (links below).

    Style Series: Best & Worst ETFs and mutual funds for:

    1. Large Cap Blend
    2. Large Cap Value
    3. All Cap Blend
    4. Large Cap Growth
    5. All Cap Growth
    6. Mid Cap Growth
    7. All Cap Value
    8. Small Cap Growth
    9. Mid cap Blend
    10. Mid Cap Value
    11. Small Cap Blend
    12. Small Cap Value
    Mar 12 9:44 AM | Link | Comment!
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