When looking through fund rankings, it's always important to separate numbers from narrative.
I like playing around with numbers, running screens on companies – that sort of thing. Occasionally, I like to play games with the screening capabilities to see how one or another of our funds can be made to look as if it’s in very select company, or perhaps even unique. While I’ll let our funds’ performance speak for themselves, what I’m interested in is showing how that sort of tactic can be misleading, or at the very least shading the truth. It’s not my intention to mislead the reader about the quality of our funds – but to show how the use of numbers and parameters can be used to tell a story that is perhaps not fully there. I am seeking, therefore, to pull back the curtain on those who use statistics the way a drunk uses a lamppost – for support rather than illumination.
For example, according to Lipper, Motley Fool Small-Mid Cap Growth Fund is the only actively managed mid-cap core fund in the country with assets above $200 million, and with top Lipper rankings in overall total return, overall consistent return, and overall tax efficiency.
While that’s not bad, it may not be as impressive as it sounds. Let's take a deeper look.
According to the Reuters Fund & ETF Screener, which uses data from Lipper, there are a grand total of 13,338(!) equity funds, and of these 970 match are classified as mid-cap funds. Of the mid-caps, 266 hold assets of more than $200 million. And of those 266, there are 10 that receive top overall ratings (putting them in the top quintile) in total return, consistent return, and tax efficiency. Here’s what the screener spits out as I run this screen on March 7. The data can change, though I believe the quintile rankings are calculated monthly.
We’re the one listed as RBB: Mtly SM Cap Gro; Inv.
Note: Lipper rankings are based on total return, including the reinvestment of dividends and capital gains but do not include sales charges for the periods indicated. Rankings shown are for Investor class Shares. On a scale of 1-5 (with 5 as the highest), the fund received an overall rating of 5 in its group of 344 Mid-Cap core Funds for the period ending 2/28/2018. The fund received a rating of 5 out of 299 funds over a 5-year period, and 5 out of 344 funds over a 3-year period. Past performance is no guarantee of future results.
OK, that’s a simple enough list. I’ve already used five different criteria – mid-cap, total assets size, and three different Lipper ranking categories – and I’ve produced a small list of qualifiers. But what if I’m compelled to look for a story that screams out “we’re unique”? How many more ways do I need to slice the data, and what am I leaving out of the story that should be in front of the reader?
First, our fund is only one of four that Lipper classifies as a “core” fund. Is that important? Is it even accurate? A couple of relevant points: Over the most recent cycle, growth stocks have crushed value stocks. Over the past 12 months, mid-cap growth funds have on average returned over 21%, mid-cap blend funds about 12.3%, and mid-cap value stocks only 9.3%. Being measured against a group of mid-cap core funds, if your strategy leans toward growth rather than value, is a huge advantage. Morningstar classifies the fund as a growth fund, and, well, there is the name: Motley Fool Small-Mid Cap Growth Fund. (Actual name does not include “Growth” in italics, but we’re making a point here.)
It isn’t that the fund can’t be considered a core fund even given its name. (We like to think of the strategy as “growth at a reasonable price.”) There are core and value stocks in the fund after all, but on balance the fund is better categorized as growth than as core. Lipper’s categorization is an obvious benefit to the fund in this type of screening exercise. It should be noted that these things come and go. Value will have its moment over growth again; be sure of that. But at the moment, to be a growth product measured against a core group is … favorable.
We haven’t isolated the fund into a unique spot – yet. There are the three Vanguard core funds on the list as well. Yes, I did say that that our fund was the only actively managed fund to make the cut. That’s true – each of the three Vanguard core funds on the list is an index fund. Should that matter to you? It might. You might favor index funds over actively managed funds, or there might be reasons you would consider or prefer actively managed. The “uniqueness” game, however, isn’t about presenting all the choices to you – it’s just trying to create a narrative that elevates the good into the special.
What about the three categories that Lipper ranks funds on — total return, consistent return, and tax efficiency? Again, we need to ask if there’s another part to the story, and indeed there is.
Lipper has five categories it ranks funds on, and the two missing from this screen are preservation and expense. Preservation measures downside risk within a category, and expense is the expense ratio of the fund – the cost of owning it. For expense, Lipper ranks our fund a 3, which places it in the middle of the pack; and for preservation, a 4, which is good, but not top quintile. In all, not bad, but also not a selling point when you’re trying to create a screen highlighting superiority.
Are there any funds that have top quintile rankings across the board? Actually, yes, the Vanguard Mid-Cap Value Index and the Vanguard Mid-Cap Index each get top marks in all five categories, so let’s give them a tip of the hat for a job well done.
Moreover, if you don’t put limit the screen by assets under management to those with at least $200 million, 22 funds make the cut, including some actively managed mid-cap core funds. A fund of greater than $200 million might be a relevant criterion for an institutional investor, but it’s a less likely factor in an individual investor’s decision-making.
I can do this with our other funds – finding ways to place them into small groups or create a unique category by selecting their very best attributes and excluding anything that doesn’t narrow down the list in a way that looks favorable – and so can everyone else, which is the point here. If you see lists of companies, or funds – or anything, really – that employs multiple criteria to arrive at a very small list, keep an eye on how many criteria are involved. The more that are used, the less persuaded you should be that illumination is the goal, rather than simply selling you a story.