Monday, February 13, 2012

Calling attention to a problem they help to cause

Karen Dolan has an article at Morningstar about what she calls the biggest cost investors can control.  No, not fees.  In this case, we are talking about performance chasing.  According to Morningstar's calculations, investors have lagged their funds by an average of 1.45% per year due to poor timing.  This is even more than the 0.8% that was paid in fees.

Of course, it isn't news that investors lag the funds they invest in.  Dalbar has been studying this for years.  I did find it interesting, however, that Morningstar was calling attention to this.  Is it really surprising that investors chase performance when Morningstar rates funds based only on past performance?  They hand out manager of the year awards, and even they know that investors will misinterpret these awards.

If you provide data that you know is not predictive, but you also know that investors will misinterpret that data, aren't you intentionally misleading people?

Tuesday, February 7, 2012

Call me when they announce the manager of next year

There tends to be a lot of talk around this time of year about the Morningstar Managers of the Year, which are announced in January for the previous year.

Marketwatch says that you should think of these like the Oscars, which say how good the actor's last performance was.  They go on to point out several high-profile crashes among former award winners.  "In fact, looking out over the last three years, managers seemed to have a rough time running money while admiring their trophies. Three of the funds finished in the bottom 10% of their peer group in the year after their triumph, another was in the bottom quartile of its category, and two more were below-average."

Dan Solin at HuffPo points out that we don't really have enough data to know whether these managers were truly skillful or merely lucky.

The Wall Street Journal adds to the noise by claiming that the awards aren't actually that bad. "For domestic managers, the verdict was mostly good. Managers in 16 of the 19 years Rekenthaler looked at either met or exceeded their category average in the following 10 years or the time elapsed since the award."  Here's a little tip - anytime someone says that a fund beat it's category average, run in the other direction.  You are being misled - remember that the "category average" trails the benchmark, usually significantly.

They do correctly point out, though, that "Like the company’s star ratings, the Manager of the Year awards are supposed to be backward-looking. But as Rekenthaler notes, no one actually reads them that way."

And isn't that the biggest problem with having these "awards" in the first place?  Isn't Morningstar deliberately misleading people by releasing data they know will be misinterpreted?

Wednesday, February 1, 2012

Can I really outsource my fiduciary responsibility?

Investing is complicated enough, and when you throw a bunch of Department of Labor regulations into the mix, things get even more complicated.

So as this article in Investment News points out, many are reacting to this by trying to outsource some fiduciary functions:  "The solution involves outsourcing fiduciary functions, and several investment advisory firms — chief among them Morningstar Investment Management, Wilshire Associates Inc. and the advisory arm of Mesirow Financial Holdings Inc. — now are providing investment menu design, fund selection, market commentary and other services to small-plan sponsors and the broker-dealers and insurers who sell such plans."  Who can blame them?

But wait, look a little further an you'll see this little tidbit: "Acting under Section 3(21) of the Employee Retirement Income Security Act of 1974, an asset manager becomes a co-fiduciary and shares fiduciary responsibility..."

So, as Ari Rosenbaum also points out, plan sponsors are still on the hook.  There is just no easy replacement for understanding the fund lineup being offered and making sure the plan participants have the information they need to make good decisions.