Thoughts

The Flawed Praise of “No Marketing”

Posted by Mike McLaughlin on Jan 31, 2014, in Thoughts , tagged with , , , ,

A recent article (subscription required) from FundFire covers Capital Group’s recent efforts to amp up its public communications. The short version is the firm is doing more to explicitly boost its brand and market itself.

I contributed a few thoughts to the article but wanted to expand a bit on this quote: There’s a badge of honor associated with not marketing.

It’s not rampant, but too often firms that say they don’t market themselves are falsely praised for having that stance. I touched on this in a post last month about Dodge & Cox, where Morningstar connected the firm’s reluctance to market itself to overall trustworthiness. Less obviously, Barron’s touched on Dimensional Fund Advisors’ lack of advertising in telling the story of that firm’s success.

The idea that a lack of marketing is somehow virtuous bothers me. Marketing is an agnostic discipline. You can execute well and you can execute poorly, but how you view marketing does not fundamentally make an organization better or worse.

More importantly (and obviously), ALL successful managers market themselves. They have Web sites. They have people who meet with prospects and tell them about the organization and what they offer. In some cases they even spend time with prominent publications so that those publications can write fawning articles. (Yes, I’m veering into sarcasm.)

I think it’s great that Capital Group has decided to be more proactive with the branding and marketing efforts. But the idea that they didn’t market themselves (or that any unwillingness to do so) was a part of why they did so well for so long is an utterly false narrative. I hope it’s a narrative that disappears across the industry.

Q1 2014 – Big Opportunity for Many

Posted by Anu Heda on Dec 10, 2013, in Thoughts , tagged with ,

Has sufficient time passed to merit investing in funds clobbered during 2008? That’s the primary thought occurring to me when I read this Morningstar article. 5-year returns starting in Q1 2014 will be completely devoid of 2008 performance. I think this situation will be extremely important to asset managers. Many financial advisors are sensitive to negative returns in the 1, 3, or 5 year periods. By that first 2014 fact sheet, many funds will have no negative performing periods.

Implications? Asset managers already free and clear of negative performance and leading with that message need to evolve to something different. Early next year, only positive performance can’t be the primary selling message, as many funds will also have only positive performance. Second, asset managers with newly all positive performance should resist leading with performance for the same reason: it isn’t differentiated.

I’d recommend asset managers consider using the unique time period to communicate changes to risk management practices and/or the underlying investment process to protect investors from the next market downturn. Our FA research aligns with the answers from this RIA (Ignites: subscription required) from Wescott: communicating process and underlying portfolio changes trumps boasting about performance.

A Misguided Assessment of “Culture”

Posted by Mike McLaughlin on Dec 06, 2013, in Thoughts , tagged with , ,

I just touched on something from Morningstar a few weeks ago, but I’ve got to go back to the well one more time.

Earlier this week the article Dodge & Cox is a Model Fund Family caught my eye, and it’s been on my mind ever since. The article’s intent is to analyze Dodge & Cox’s corporate culture as a key element in Morningstar’s stewardship evaluation for the firm. To be transparent on where I’m coming from, three initial thoughts:

  1. I conceptually understand and see merit in Morningstar’s goal to evaluate stewardship.
  2. However, I struggle with any assessment and judgment on culture. Culture is a byproduct of the people, dynamics, business situation, etc. of a company. It’s not an input.
  3. When was the last time you read a story about how awesome the culture is at a company that is performing terribly financially and/or letting people go?

In most cases, assessing culture is simply a qualitative and subjective exercise that ultimately supports preconceived notions of an organization. Dodge & Cox is a private company that has been hugely successful for 80+ years. Anyone would be hard-pressed to objectively and convincingly conclude that the culture there is one that doesn’t work.

To that end, the Morningstar article feels like a hollow exercise, and in fact one that is a bit condescending to other asset managers. The one thought that really stands out to me is this:

There are other reasons to trust the firm. It shuns marketing and advertising, has no salespeople, and has rolled out just five funds in eight decades.

Equating an aversion to sales, marketing, and product development with great culture and stewardship implies that embracing those things negatively impacts a firm. Ridiculous.

Morningstar thoughtfully updates its methodology on a regular basis. The cultural component of its assessment of funds and firms is one that I think needs to be reconsidered.

How Helpful is Grantham’s Bubble Prediction?

Posted by Mike McLaughlin on Nov 22, 2013, in Thoughts , tagged with , ,

I spent some time today with GMO’s third-quarter letter (PDF) to investors, specifically the already-much-discussed thoughts from Jeremy Grantham. Mr. Grantham touches on a number of topics, but the part that piques my interest is his take on the pending stock market bubble:

…so I would think that we are probably in the slow build-up to something interesting – a badly overpriced market and bubble conditions. My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up. And then we will have the third in the series of serious market busts since 1999…

This take made me think about a recent Slate blog post regarding the value of bubble-related predictions. If you don’t want to click through, here’s the important take from Matthew Yglesias:

I think it’s important to recognize how fundamentally unimpressive it is to call a financial crash years in advance. If I predict to you today that the stock market is going to crash soon and people are going to lose a lot of money, and then people keep making money for the next 40 months and then the stock market crashes, that would hardly make me a genius financial forecaster.

I find that point of view extremely valid. Investment managers consistently throw out “strong” predictions, but too often those predictions are couched in an unspecific timeframe. There isn’t much value in that.

In Mr. Grantham’s case, his prediction is on a middle ground. The 20-30% appreciation is specific; the timeframe less so; and there’s no commentary on how the variables should be balanced (e.g., what if the 30% appreciation happens over the next 7 months?).

As one advisor said to me, “At some point he will be right. But there’s nothing here for me to act on.”

Morningstar’s Missing Ingredient

Posted by Mike McLaughlin on Nov 13, 2013, in Thoughts , tagged with , , ,

A few weeks back Morningstar published a short article called Investors Have Flocked to these So-So Funds. A good title and an analysis of why three purportedly mediocre funds with “lackluster profiles” remain successful in gathering assets had me hooked.

Unfortunately, the analysis left me disappointed. First of all, two of the funds had pretty clear (albeit superficial) reasons why investors would be attracted to them. The Federated Strategic Value Dividend Fund landed in the 97th percentile of its category for 2012 performance; the Janus Triton Fund has generated “strong returns” as Morningstar notes in its very first sentence and currently holds a 5-star rating.

The final fund of the three, the  T. Rowe Price International Growth & Income Fund, presents a more interesting case. Per Morningstar it has outperformed peers but not the index, has a portfolio largely undifferentiated from the underlying index, and carries a 3-star rating. Ok, so maybe this is an example of a so-so fund that is garnering assets. Why is that happening?

Morningstar never answers its own question. And the article makes obvious that Morningstar specifically fails to consider a singularly critical ingredient in a fund’s success: distribution. Maybe these funds have premium shelf space with broker-dealers, widespread presence on DC platforms, or just a good story supported aggressively and effectively by wholesalers.

Figuring out why good funds struggle and bad funds thrive is a great challenge, but answering it requires analyzing ALL of the variables that influence those outcomes.