How an Advisors’ Advisor Chooses 'Best in Class' Funds

With its 0.55% expense ratio, it “suddenly became the least expensive way” to own this asset class (compared to PCRIX’s 0.74% expense ratio).

In a taxable account — which he does not recommend for this tax-inefficient asset class — Haas would favor PowerShares DB Commodity Index Tracking Fund (DBC),“because of its expected perfect capital-gains tax efficiency as an ETF,” he states on his website. DBC’s expense ratio is 0.83%.

What makes a mutual fund or ETF best in class? “There’s a little bit of art and a little bit of science in answering that question,” he says.

Here’s the science: “Something that is more diversified is better than something that is less diversified; something that’s lower cost is better than something that is higher cost. “In a taxable account, something that’s more tax-efficient is better than something that is less tax efficient. These are undeniable truths. Those are the easy ones,” he shares.

Finding the right small-cap fund would be an example of a harder case involving a bit more of the investment professional’s art.

“What makes it small cap is the smallness of the stocks that it owns. It makes a certain amount of sense to look for smaller small-cap stocks than larger small-caps. But — the smallest small-cap funds are more expensive than the larger ones,” according to Haas.

Thus, the Vanguard Small Cap Index Fund ETF Shares (VB) is cheap; its expense ratio is just 0.15%.

DFA’s U.S. Microcap Portfolio (DFSCX) significantly lowers the average market-cap but charges 52 basis points.

“Costlier” still is theBridgeway Ultra-Small Company Market Fund (BRSIX), but that is Haas’ favorite.

The fund's weighted average market capitalization was 79% smaller than the Vanguard Small Cap Index Fund's and 53% smaller than the DFA US Micro Cap, according to the calculation on his website, which notes that “there is a dramatic difference between how funds investing in the absolute tiniest stocks perform versus those investing in merely ‘small’ stocks.’ ” 

Valuable as all this research and analysis is, Haas views it as “small stuff.” The real value in his work is his relationship with clients, which enables him to prevent them from harming themselves in a market panic.

“We think that having [clients] pick their asset allocations in an informed fashion will help preclude them from panicking when the going gets tough,” says Haas. “It’s going to happen. We don’t know how down it’s going to be, but when it happens, [investors] have a well documented pattern of selling at the worst time. They lock in the losses by putting it in cash, or they take their money and put it into something that’s been doing well recently. Each time they do this it decreases their ending wealth by perhaps 30%.”

Haas is doing well enough pleasing clients from all across America and even as far as Hong Kong. His advice to other advisors, especially poignant in these times of heightened market volatility: “Avoid a subtraction of 30% ending wealth. That’s a huge value added.”