Friday, 12 April 2019 13:38

When to Dump a Losing Mutual Fund

(New York)

The Wall Street Journal has published an interesting article giving advice to investors on how to assess, and when to dump, losing mutual funds. The article makes the point that investors should not automatically clear out their losing funds, just like they shouldn’t always buy winning ones. Funds have their own reasons for poor performance and those reasons can have a big impact on whether they should stay in a portfolio. Here are four questions to ask in assessing funds, “Does the fund have a good process in place?”, “Is the manager sticking to his or her own guns?”, “Is there a new manager, and do I trust him or her?”, “Is this negative performance coming in a segment of the market in which it is tough to beat index funds?”.


FINSUM: Good funds can have significant down periods, so it is important to have a methodology for deciding if and when to dump them.

Published in Eq: Value

(New York)

The media is reacting very strongly to a new move by Morningstar. The legendary fund rating company has just taken the somewhat surprising move of replacing outside funds with some of its own in its “managed portfolio service”, which allows financial advisors to outsource investment decisions to Morningstar. It will now rely on its own funds as the building blocks of those portfolios. Its own funds will be scored by the company itself, but it says an algorithm will do this. The company’s CIO says “We have structures in place to make sure [investment management] is at arm’s length from research. There is structural separation of research and investment management”.


FINSUM: We think this is a ridiculous conflict of interest, made even sillier by the fact that Morningstar acts like an algorithm is any less biased than a human rating system. As if Morningstar did not write the algorithm in the first place…

Published in Wealth Management
Thursday, 07 December 2017 14:09

The Problem with the Golden Rule of Allocation

(New York)

“105 minus your age” has long been the golden standard, or back of the envelope standard, for allocation. While the rule has some merit, it has some big flaws too, as the WSJ has pointed out today. One big issue with it is that it does not all take into account an investor’s risk appetite. Risk itself has two facets—an investor’s willingness to take risk, and their realistic ability to do so. It is on the former point where the rule is so poor, because it could force a more risk averse investor into huge losses if they sell at the bottom of a downturn.


FINSUM: The bottom line here, as any financial advisor knows, is that each individual’s circumstances should have a major effect on their allocation strategy.

Published in Wealth Management

(New York)

The fiduciary rule is pushing the industry in yet another unwelcome direction for advisors. After the Financial Crisis many advisors opted to work as portfolio managers for their clients, with the ability to steer allocation as they saw fit. However, alongside the new fiduciary rule, firms are trying to claw back that ability, often called “home office discretion”. Firms say that advisors are not as good at steering client assets as when it is done in headquarters, so taking back the responsibility is seen as an aspect of fiduciary duty. Advisors don’t like this change because portfolio management is one of the ways they can differentiate themselves and justify their fees to clients.


FINSUM: This raises an interesting philosophical question about the fiduciary rule—where is the border between firm and advisor-level fiduciary duty?

Published in Wealth Management

(New York)

Bloomberg says advisors have a problem on their hands—that US clients’ love of domestic stocks is hurting their portfolios. Call it patriotism or home-bias, but American investors love to invest in US equities. The big problem is that US stocks have some of the highest valuations in the world, meaning they are not good value for money versus many international markets at the moment. However, that has not kept Americans from buying them hand over fist and increasing their overall exposure to the market.


FINSUM: This is one of the things that many American investors don’t do particularly well, especially on the retail end—diversify. But then again that is what also drives big gains in the market.

Published in Eq: Large Cap
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