A Very Unattractive Fund That Morningstar Gives 4 Stars

Meridian Contrarian Fund (MFCAX, MFCCX, MFCIX, MVALX) is an All Cap Blend funds investors should avoid. The fund’s poor holdings^[1] and high fees diminish the likelihood that the fund will outperform moving forward. Meridian Contrarian Fund (MFCAX) is in the Danger Zone this week.

Traditional Fund Research Misses this Fund’s Flaws

Per Figure 1, MFCAX receives a 4-Star rating from Morningstar and the remaining classes receive a 3 or 4-Star rating as well. When viewed through our Predictive Risk/Reward Fund Ratingmethodology, all four classes earn an Unattractive-or-worse rating, with MFCAX earning a Very Unattractive rating.

Figure 1: Meridian Contrarian Fund Ratings

Sources: New Constructs, LLC and company filings 

Holdings Quality Analysis Reveals Poor Allocation vs. Benchmark

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 make this determination on holdings quality, we leverage our Robo-Analyst technology to drill down and analyze the individual stocks in every fund we cover.

Figure 2: Meridian Contrarian Fund (MFCAX) Asset Allocation

Sources: New Constructs, LLC and company filings

Per Figure 2, Meridian Contrarian Fund’s asset allocation increases downside risk compared to its benchmark, iShares Russell 3000 (IWV). MFCAX allocates only 8% of its portfolio to Attractive-or-better rated stocks compared to 20% for IWV. Exposure to Very Unattractive rated stocks is much higher for MFCAX (48% of portfolio) than for IWV (34% of portfolio). Overall, MFCAX allocates 31% of its portfolio to stocks with a Neutral-or-better rating while IWV allocates 63% of its portfolio to Neutral-or-better rated stocks.

Seven of the mutual fund’s top 10 holdings receive an Unattractive rating and make up 21% of its portfolio. One of the top 10 holdings is previous Danger Zone pick Verint Systems (VRNT). In total, nine of the top 10 receive a Neutral-or-worse rating and make up 27% of MFCAX’s portfolio.