Morningstar’s Missing Ingredient
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.