My investment advisory firm is located within a five-minute drive of the Mississippi River here in the St. Louis metropolitan area. Not long ago, I heard a tall fishing tale from an underwater welding specialist who repairs bridges along the Mississippi River. The oversized dimensions he described of a river catfish that brushed alongside him while he was doing some repair work on an arch bridge sounded almost unbelievable. There are similarities in the way a bottom feeder catfish hunts for food and in the way an enterprising investor finds undervalued securities using a selection approach that Benjamin Graham wrote about in his book The Intelligent Investor.
I can’t imagine Graham, a self-made millionaire and Ivy League academic, enjoying the idea of having his ideas compared with a stinky fish swimming in the muddy Mississippi, but let’s do it anyway. Both the catfish and the enterprising investor find value
The Small Cap Value style ranks twelfth out of the twelve fund styles as detailed in my Style Rankings for ETFs and Mutual Funds report. It gets my Dangerous rating, which is based on aggregation of ratings of 15 ETFs and 257 mutual funds in the Small Cap Value style as of July 31, 2014. Prior reports on the best & worst ETFs and mutual funds in every sector and style are here.
Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Small Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 16 to 1561). This variation creates drastically different investment implications and, therefore, 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.