David Trainer | May 10, 2012 03:15AM ET
Fund holdings affect fund performance more than fees or past performance. A cheap fund is not necessarily a good fund. A fund that has done well in the past is not likely to do well in the future. Yet, traditional fund research focuses only on low fees and past performance.
Our research on holdings enables investors’ to find funds with high quality holdings – AND – low fees.
Investors are good at picking cheap funds. We want them to be better at picking funds with good stocks. Both are required to maximize success.
Figure 1 shows that 53% of funds assets are in ETFs and mutual funds with low costs but only 4% of assets are in ETFs and mutual funds with Attractive holdings. This discrepancy is astounding.
Figure 1: Allocation of Fund Assets By Holdings Quality and By Costs
These issues are related, in my opinion. If investors had more insight into the quality of funds’ holdings, I think they would allocate a lot less money to funds with poor quality holdings.
Traditional ETF and fund research focuses only on low fees and past performance. Investors deserve research on the quality of stocks held by ETFs and mutual funds.
Quality of holdings is the single most important factor in determining an ETF or mutual fund’s future performance. No matter how low the costs, if the ETF or mutual fund holds bad stocks, performance will be poor. Costs are easy to find but research on the quality of holdings is almost non-existent.
Figure 2 shows investors are not putting enough money into ETFs and mutual funds with high-quality holdings. Only 442 of 7471 (4% of assets) of ETFs and mutual funds allocate a significantly to quality holdings. 96% of assets are in funds that do not justify their costs and over charge investors for poor portfolio management.
Figure 2: Distribution of ETFs & Mutual Funds (Count & Assets) By Portfolio Management Rating
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