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Don’t Forgo Diligence: This Fund’s Strategy Doesn’t Hold Up

New Constructs

New Constructs
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Investment Analyst

Check out this week’s Danger Zone interview with Chuck Jaffe of Money Life.

We have shown empirically, that legacy measures of earnings fail to provide investors with reliable measures of corporate performance because they fail to account for unusual gains and losses (hidden and reported). Investors armed with our measure of core earnings benefit from a more informed view of the fundamentals and, therefore, the valuation of markets and stocks.

We leverage this uniquely rigorous diligence on stocks to derive our mutual fund ratings. This diligence provides insights into the fundamentals of the overall fund so investors can determine whether or not a fund allocates sufficiently to quality stocks and can justify its fees. This week, we’ve identified a mutual fund with a methodology that largely fails to find quality stocks and charges above average fees in the process.

Despite its 4-Star Morningstar rating, JPMorgan Mid Cap Growth Fund (OSGIX) is in the Danger Zone.

Backwards Looking Research Overrates this Fund

Investors that rely solely on past performance may miss the true risk of investing in this fund. Per Figure 1, OSGIX, OMGCX, JMGZX, JMGPX, JMGQX, HLGEX, JMGFX, and JMGMX earn the 4-Star rating from Morningstar.

Meanwhile, OSGIX earns our Very Unattractive Rating, the worst of our Predictive Risk/Reward Fund ratings, which leverage our superior research[1] featured by Harvard Business School and MIT Sloan. The other share classes of this fund earn our Unattractive rating.  

Figure 1: JPMorgan Mid Cap Growth Fund Ratings

JPMorgan Mid Cap Growth Fund Ratings

Sources: New Constructs, LLC, company, ETF and mutual fund filings, and Morningstar

OSGIX allocates significantly more capital to companies with low profitability and high profit growth expectations baked into their stock prices, which makes its portfolio riskier than the benchmark and the overall market.

Click Here to Read the Full Article

This article originally published on July 27, 2020.

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[1] Our core earnings are a superior measure of profits, as demonstrated in Core Earnings: New Data & Evidence a paper by professors at Harvard Business School (HBS) & MIT Sloan. The paper empirically shows that our data is superior to “Operating Income After Depreciation” and “Income Before Special Items” from Compustat, owned by S&P Global (SPGI).

[2] Harvard Business School features the powerful impact of our research automation technology in the case study New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.

[3] Compare our analytics on a mega cap company to Bloomberg and Capital IQ’s (SPGI) analytics in the detailed appendix of this paper.

Click here to download a PDF of this report.

Disclosure: New Constructs

Disclosure: David Trainer, Kyle Guske II, Sam McBride, Andrew Gallagher, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

About New Constructs

Our stock rating methodology instantly informs you of the quality of the business and the fairness of the stock’s valuation. We do the diligence on earnings quality and valuation so you don’t have to.

In-depth risk/reward analysis underpins our stock rating. Our stock rating methodology grades every stock according to what we believe are the 5 most important criteria for assessing the quality of a stock. Each grade reflects the balance of potential risk and reward of buying that stock. Our analysis results in the 5 ratings described below. Very Attractive and Attractive correspond to a “Buy” rating, Very Unattractive and Unattractive correspond to a “Sell” rating, while Neutral corresponds to a “Hold” rating.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from New Constructs and is being posted with permission from New Constructs. The views expressed in this material are solely those of the author and/or New Constructs and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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