Valeant Pharmaceuticals (VRX: $33/share) fell 51% yesterday and the stock still has further to fall. While direct share holders stand to lose the most, certain fund investors face significant downside risk as well. These investors may not realize the risk they’re taking due to the shortcomings of traditional fund research, which doesn’t focus on fund holdings.
By analyzing each holding of a fund, we provide investors with deeper insight into the risk/reward of funds. Our predictive ratings for ETFs and mutual funds give investors a different perspective as they are based on the quality of the fund’s holdings. Figure 1 shows the 10 ETFs and mutual funds that allocate significantly to VRX and could pose a risk to investors’ portfolios.
Figure 1: Funds With Exposure To and Risk of Decline from Holding VRX
Sources: New Constructs, LLC and company filings
Sequoia Fund (SEQUX) allocates just below 25% of its assets to Valeant. Diamond Hill Select Fund (DHTAX), Northern Lights 13D Activist Fund (DDDAX), FundVantage Private Capital Management Value Fund (VFPIX), Catalyst Insider Buying Fund (INSAX), and Catalyst/Groesbeck Aggressive Growth Fund (GROAX) earn a Dangerous-or-worse rating in part because of their poor holdings like VRX, but also because each fund charges investors high total annual costs.
It’s not all negative though. Nicholas Fund (NICSX) and Global X Guru Index ETF (GURU) earn an Attractive-or-better rating because the quality of the entirety of holdings makes up for their allocation to VRX.
The takeaway is: Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Those who bought VRX based on trust in the company non-GAAP earnings did not understand the firm’s true finances, which showed Valeant was not a good business. Without analyzing each holding, inventors are taking on unnecessary risk when investing in ETFs or mutual funds.
