My top-rated mutual fund is GMO Trust: GMO Quality Fund (GQLOZ). It is one of only four funds (out of 7400+) to get my Very Attractive rating. It gets my top rating because 68% of the fund is in Attractive-or-better rated stocks and none of the fund is in Dangerous-or-worse rated stocks. My report has all details.
All of the fund’s top five holdings get my Attractive-or-better rating, including Microsoft (MSFT) – Very Attractive rating. MSFT gets my best rating because the company’s’ ROIC, at 72%, ranks 8th in the S&P 500 while its stock price (~$33/share) implies the company’s profits will permanently decline by about 20%. High profitability and low valuation create excellent risk/reward in a stock.
My definition of good risk/reward for a fund is the same, and my stock research is the foundation of my fund research. Ergo, my fund ratings are predictive just as my stock ratings are predictive. Seems fair, no?
Certainly, no one can claim to have perfect predictive powers, but that is not the point. The point is that the quality of fund research should be closer to the quality of stock research. The backward-looking ratings that dominate fund research are, in many ways, a disservice to investors.
So, after reading Chuck Jaffe’s “Be wary of predictive mutual-fund ratings”, I wondered: should we be wary of backward-looking mutual fund ratings? The answer is “yes”.
Ever hear of the “five-star kiss of death”?
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(Read more from David Trainer on his blog, The Intelligent Investor.)
