(New York)

Investors likely already know that low cost index funds tend to greatly outperform high fee actively managed funds (to the tune of 1.5% or more annually). That comes as no surprise. However, what was surprising to us is that in fixed income, the tables are greatly turned. While passive funds do have a slight edge over active ones on average (0.18% per year), in many cases high fee actively managed fixed income funds outperform passive ones. This holds true over long time periods, including ten-year horizons.

FINSUM: This is an interesting finding and one that makes intuitive sense. The bond market is vast, hard to access, and full of intricacies. That kind of environment lends itself to specialism in a way that large cap equities does not, and the performance metrics show it.

Published in Bonds: Total Market

New York)

Fidelity made history this week by introducing the first zero fee funds, which will track very broad self-indexed markets. Fidelity’s move is somewhat of a ploy, and definitely a demonstration of scale, as the company has many ways to profit from a customer once it has them in the door. But don’t be fooled, as fees aren’t everything. In fact, there are significant differences in performance even between index trackers of the same benchmark, like the S&P 500, and the differences between them can add up to a whole lot more than the difference in fees. For instance, Schwab and Vanguard already have broad index trackers at 3 and 6 basis points of fees, so hardly a big difference to zero, especially if their performance is better.

FINSUM: “Zero” definitely changes things, but once you are in the sub-15 bp fee category, performance is going to make a bigger difference than fees.

Published in Wealth Management
Friday, 27 October 2017 07:53

WSJ Exposes Sham of Morningstar Ratings

(New York)

The Wall Street Journal has published an in-depth expose article calling out Morningstar for running a high misleading business that deceives investors. The newspaper did a study of Morningstar ratings versus long-term performance and found that 5-star rated Morningstar funds did not actually perform any better despite the majority of investors thinking they do. Summarizing the performance of Morningstar’s five-star rated funds, the WSJ says “only 12% did well enough over the next five years to earn a top rating for that period; 10% performed so poorly they were branded with a rock-bottom one-star rating”. The ratings are hugely important to the mutual fund business, and star ratings have a very large effect on directing investor Dollars. Morningstar argues that its funds were never meant to predict past performance, but are merely assembled as a guide to past performance.

FINSUM: We think the WSJ is overstepping the mark here. Everyone in investing knows past performance is no indicator of future returns. Morningstar does little more than compile and rate a large set of data, and that is useful to investors.

Published in Wealth Management


Many probably don’t know it, but FINRA is an investor itself. The regulator runs a $1.6bn portfolio and has been experiencing poor returns for years. Since its inception in 2004, it has returned just 3.4% annually, versus 6% for a half-stock half-bond portfolio. The weak returns have real meaning too, as in years where the fund does well, FINRA rebates some of the fees paid by its members. It has not done so since 2014.

FINSUM: FINRA’s investment fund is not very well-known, and now it is clear why. The history of the fund’s decisions looks like a laundry list of “what not to do” investing articles.

Published in Eq: Total Market

(New York)

The US pension system has been hanging on by a thread, and now it looks likely to collapse. The system has been underfunded in many areas for years, and now it really looks to be on its last legs. The reason why is terrible returns. Long-term returns for US public pension funds are set to hit their lowest levels ever recorded, creating even more pain for cities and states as the $1 tn funding gap expands. Pensions’ 20-year returns are set to hit just 7.47% once fiscal 2016 results are in, which would be the lowest mark ever recorded. In 2001, at the height of the dotcom boom, the figure hit 12.3%. Pension managers have long said they can make up for a couple of years of bad returns with good long-term performance, so the 20-year return is significant because it shows that returns are actually in systemic decline. With returns so low, the long growing gap might finally need to be addressed as unfunded liabilities are reaching a crushing mass in state and local budgets, such as in Chicago or Connecticut.

FINSUM: The Federal government is probably going to have to step up and address this huge issue. Here is a crazy idea, why doesn’t the Fed shower the US pension system with helicopter money?

Source: Wall Street Journal

Published in Economy
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