Fund Scores Pick Winners

4/18/2016


To evaluate a fund's growth potential, the first thing we check is our proprietary fund score.

The scores rank traditional mutual funds and exchange-traded funds relative to their categories, using total returns for up to five years, expense ratios, tax-efficiency, and risk-adjusted performance. Currently, we rank nearly 5,600 funds, up from 3,800 five years ago.

In a back-test since the end of 2009, funds with high scores tended to outperform while low scorers typically lagged. To measure effectiveness, we considered how funds in the top and bottom quintiles (generally scoring above 80 or below 20) went on to perform over the next 12 months, relative to the average fund in their category. Our number-crunching, which spans more than 60 rolling periods, covered 29 large and popular fund categories. A summary of the back-test can be viewed here: www.DowTheory.com/Go/Funds1.

For this story, we focused on U.S. stock funds — the cornerstone of most portfolios. Check out the table below. On average, the top one-fifth of domestic stock funds as measured by fund scores generated returns 0.7% above category averages. The median outperformance was 0.8%. Notably, scores were effective across all nine style categories and notched an average winning percentage of 77%. On average, funds in the bottom quintile went on to underperform over the next 12 months in all nine categories, with an average underperformance of 1.3%.

HIGHER FUND SCORES, BETTER RETURNS
In a back-test since 2009 using our fund scores, the top one-fifth of U.S. stock funds outperformed the average fund by 0.7% over 62 rolling 12-month periods. Top scorers outperformed in 77% of the periods.
------------------ 12-Month Returns Relative To Category Average ------------------
-------- Top One-Fifth Of Funds --------
------- Bottom One-Fifth Of Funds -------
Category
Average
(%)
Median
(%)
Winning
%
Average
(%)
Median
(%)
Winning
%
Large-cap blend
0.5
0.5
73
(1.1)
(1.3)
21
Large-cap growth
1.3
1.5
89
(1.4)
(1.7)
11
Large-cap value
0.4
0.6
74
(0.8)
(0.8)
29
Midcap blend
0.6
0.7
71
(2.4)
(2.3)
3
Midcap growth
0.7
0.5
76
(0.7)
(0.8)
24
Midcap value
0.8
0.7
82
(2.0)
(2.2)
13
Small-cap blend
0.7
1.0
74
(1.6)
(1.8)
24
Small-cap growth
0.8
0.8
81
(1.5)
(1.3)
10
Small-cap value
0.7
0.6
69
(0.9)
(0.8)
35
U.S. stock funds
0.7
0.8
77
(1.3)
(1.4)
19

Despite the power of our fund scores, we don't make buy or sell decisions based solely on the ranks. The scores rely mostly on historical data and simply can't capture all factors that impact performance. Moreover, our research universe is influenced by survivorship bias — the tendency for fund companies to shutter funds with poor performance or limited assets. And, for better or worse, our scores favor the very cheapest funds, which partly explains why Vanguard funds account for 11 of our 19 recommended picks.

Still, the scores uncover high-potential funds worth further inspection. Our 19 recommended funds listed below sport an average rank of 90, with nine earning scores of 95 or higher. Boasting a score of 96, T. Rowe Price QM U.S. Small-Cap Growth ($25; PRDSX) ranks near the top 4% of its category. The fund focuses on high-quality companies generating good cash flow. The fund ranks among the top 6% of its peer group for three-, five-, and 10-year performance.

OUR RECOMMENDED MUTUAL FUNDS
Year-To-Date *
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating †
Baird Core Plus Bond ($12; BCOSX)
3.3
A
9
4
84
Dreyfus MidCap Index ($33; PESPX)
3.3
A
0
0
72
Dreyfus Small Cap Stock Index ($26 DISSX)
1.2
B
0
0
96
Fidelity Overseas ($40; FOSFX)
(2.2)
C
9
9
98
iShares MSCI EAFE Small-Cap ETF ($51; SCZ)
0.4
C
4
6
94
PRIMECAP Odyssey Stock ($24; POSKX)
(0.3)
D
10
10
84
T. Rowe Price QM U.S. Small-Cap
($25; PRDSX)
(3.2)
B
7
7
96
T. Rowe Price Value ($31; TRVLX)
0.4
D
10
11
79
Vanguard 500 Index ($190; VFINX)
1.5
B
7
8
86
Vanguard GNMA ($11; VFIIX)
2.0
C
0
0
88
Vanguard Growth Index ($55; VIGRX)
0.6
A
10
11
91
Vanguard High-Yield Corp. ($6; VWEHX)
3.0
C
5
6
98
Vanguard Inter.-Term Tax Exempt
($14; VWITX)
2.1
B
0
0
95
Vanguard Selected Value ($26; VASVX)
1.6
C
5
8
76
Vanguard Short-Term Invest. Grade
($11; VFSTX)
1.9
A
9
4
99
Vanguard Strategic Small-Cap ($29; VSTCX)
(0.2)
C
5
6
95
Vanguard Total Bond Mkt. Index
($11; VBMFX)
3.3
A
0
0
81
Vanguard Wellesley Income ($25; VWINX)
4.2
A
0
0
100
Vanguard Wellington ($37; VWELX)
2.4
A
10
10
97

* Year-to-date ranks through April 12 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%;
E = bottom 20%. †  Fund ratings are percentile ranks based on our fund-rating system.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com