Best & Worst ETFs and Mutual Funds: All-cap Growth Style

The All-cap Growth style ranks fifth out of the twelve fund styles as detailed in my Style Rankings for ETFs and Mutual Funds report. It gets my Neutral rating, which is based on aggregation of ratings of 2 ETFs and 466 mutual funds in the All-cap Growth style as of May 2, 2013. Prior reports on the best & worst ETFs and mutual funds in every sector and style are here.

Figure 1 ranks from best to worst the two All-cap Growth ETFs and Figure 2 shows the five best and worst-rated all-cap growth mutual funds. Not all All-cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 18 to 2,021), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst, which allocate too much value to Neutral-or-worse-rated stocks.

To identify the best and avoid the worst ETFs and mutual funds within the All-cap Growth style, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Investors need not rely on backward-looking ratings.

My fund rating methodology is detailed here.

Investors seeking exposure to the All-cap Growth style should buy one of the Attractive-or-better rated mutual funds from Figure 2.

Get my ratings on all ETFs and mutual funds in this style on my free mutual fund and ETF screener.

* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

iShares Russell 3000 Growth Index Fund (IWZ) is my top-rated All-cap Growth ETF and Columbia Large Growth Quantitative Fund (RDLIX) is my top-rated All-cap Growth mutual fund. IWZ earns my Neutral rating and RDLIX earns my Attractive rating.

First Trust Multi Cap Growth AlphaDEX Fund (FAD) is my worst-rated All-cap Growth ETF and Northern Lights Fund Trust: 13D Activist Fund (DDDAX) is my worst-rated All-cap Growth mutual fund. FAD earns my Neutral rating and DDDAX earns my Very Dangerous rating.

Figure 3 shows that 416 out of the 2,102 stocks (over 29% of the market value) in All-cap Growth ETFs and mutual funds get an Attractive-or-better rating. However, no ETFS and only 13 out of 466 All-cap Growth mutual funds (3% of total net assets) get an Attractive-or-better rating.

I am astonished that no ETFs and just 3% of mutual funds allocate enough to the Attractive stocks in this style given that they make up 29% of the market value of stocks in the style.

The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and All-cap Growth ETFs hold poor quality stocks.

Sources: New Constructs, LLC and company filings

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.

Investors need to tread carefully when considering All-cap Growth ETFs and mutual funds, as 125 mutual funds in the All-cap Growth style (over 27% of total net assets) earn a Dangerous-or-worse rating. The bad far outweighs the good in this style.

TJX Companies (TJX) is one of my favorite stocks held by All-cap Growth ETFs and mutual funds and earns my Attractive rating. TJX has been growing at an impressive rate in recent years. Its after tax profit (NOPAT) has grown by 14% compounded annually since 2007. This growth has helped TJX to achieve a top quintile return on invested capital (ROIC) of 19% in the most recent fiscal year. Solid fundamentals are nice, but strong fundamentals combined with a low valuation are even better. Despite its track record of growth, TJX is priced with very modest expectations.

At its current valuation of ~$48.36/share, TJX has a price to economic book value ratio of only 1.2, implying that its NOPAT will never exceed 120% of its current value. At its current rate of growth, TJX should easily exceed this expectation. My discounted cash flow model shows that the company can meet the market’s expectations with just three years of 5% NOPAT growth. The stock is worth $60/share if the company grows NOPAT at 6% for eight years. I think market expectations are low, and investors should buy at these levels.

CBRE Group, Inc (CBG) is one of my least favorite stocks held by All-cap Growth ETFs and mutual funds and earns my Very Dangerous rating. CBG had over $1.2 billion in accumulated asset write-downs on the books in 2012, a number that has been steadily increasing for several years now and represents over 21% of the company’s net assets. Very few companies can succeed when 20 cents out of every dollar invested is being destroyed, and CBG is no exception. Its 7% ROIC in 2012 fell short of its 8% weighted average cost of capital (WACC), meaning CBG made negative economic earnings for the fifth straight year.

When one contrasts this poor performance from CBG with the high expectations built into its stock price, the investment outlook gets pretty bleak. To justify its current valuation of ~$24.04/share, CBG would need to grow NOPAT by 15% compounded annually for 11 years. Considering the fact that CBG’s NOPAT actually declined slightly last year, it’s hard to justify that optimism. The housing market may be recovering, but with the poor management CBG has displayed in recent years I’m still skeptical that it can achieve the lofty expectations the market has for future profits.

Figures 4 and 5 show the rating landscape of all All-cap Growth ETFs and mutual funds.

My Style Rankings for ETFs and Mutual Funds report ranks all styles and highlights those that offer the best investments.

Review my full list of ratings and rankings along with reports on all 2 ETFs and 466 mutual funds in the All-cap Growth style.

Sam McBride contributed to this report.

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