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You Don’t Need to Overpay for Technology Stocks

New Constructs

New Constructs
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Investment Analyst

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Our sector ratings show that the Technology sector receives a premium valuation compared to the market. Due to the high risk that comes with this elevated valuation, some investors might believe that diversifying their exposure through a Technology mutual fund is the best option. However, if the mutual fund chooses poor stocks and charges high fees, the results could be worse than picking your own stocks. Utilizing our Predictive Risk/Reward Fund rating methodology, we have identified a Technology fund that charges investors above average fees for overvalued stocks.

Despite its high Morningstar and Zacks rating, AllianzGI Technology Fund (RAGTX) is a mutual fund investors should avoid. RAGTX is in the Danger Zone.

Backwards Looking Research Overrates this Fund

Per Figure 1, RAGTX receives a 4-Star rating from Morningstar and a “Buy” rating from Zacks. When viewed through our Predictive Risk/Reward Fund Rating methodology, all share classes earn a Very Unattractive rating.

Figure 1: AllianzGI Technology Fund Ratings

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

RAGTX allocates significant capital to micro-bubble stocks – like Amazon (AMZN) – that make its past performance look good but pose elevated risk going forward. Investors that rely on past performance won’t understand the true risk of investing in this fund.

Holdings Research Reveals a Low-Quality Portfolio

The only justification for a mutual fund to charge higher fees than its ETF benchmark is “active” management that leads to out-performance. A fund is most likely to outperform if it has higher quality holdings than its benchmark. To assess holdings quality, we leverage our Robo-Analyst technology[1] to drill down and analyze the individual stocks in every fund we cover.

Figure 2: RAGTX Allocates Capital to Lower-Quality Holdings

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

Per Figure 2, AllianzGI Technology Fund’s asset allocation poses greater downside risk and holds less upside potential than its benchmark, the Invesco QQQ Trust (QQQ).

RAGTX allocates only 15% of its portfolio to Attractive-or-better rated stocks compared to 35% for QQQ. On the flip side, RAGTX’s exposure to Unattractive-or-worse rated stocks is much higher, at 54%, than QQQ, at 30%. See Figure 3.

Figure 3: RAGTX vs. QQQ – Attractive & Unattractive Asset Allocation

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

Six of the mutual fund’s top 10 holdings receive an Unattractive-or-worse rating. These six stocks make up 23% of its portfolio.

Given the unfavorable allocation of Very Attractive vs. Very Unattractive stocks relative to the benchmark, RAGTX appears poorly positioned to generate the out-performance required to justify its fees.

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

[2] This paper compares our analytics on a mega cap company to other major providers.

This article originally published on September 30, 2019.

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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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