Morningstar

Data Presentation

Can We Make Data More Digestible?

Posted by Mike McLaughlin on Feb 20, 2017, in Thoughts , tagged with , , ,

25 home runs. 100 runs batted in. A .293 batting average.

Those data points, in part, summarize the 2016 baseball season of Jose Abreu, the best offensive player on my favorite team, the Chicago White Sox. Baseball has undergone a huge statistical revolution over the last 20 years. I chose three very traditional data points for Abreu, but the fact is there are literally hundreds of individual stats tracked for players these days.

All of that data is well and good, but digesting it can lead to a very simple question: just how good was Jose Abreu in 2016? It turns out there’s a clear answer to that question, because one thing baseball has done very well is simplify complex data.

For example, there’s a statistic called Weighted Runs Created Plus, or wRC+. It summarizes a player’s entire offensive value in a single number. Without diving into the technical details, two things make wRC+ very effective:

  1. It adjusts for context. Specifically it adjusts results based on (a) league-wide averages, and (b) the stadium the player plays in (since some are more or less friendly for offense than others).
  2. It summarizes everything in a SINGLE number. A wRC+ value of 100 represents league average. Every point above or below that represents a result that is 1% better or worse than average. So, Abreu’s wRC+ of 118 means he was 18% better than the average offensive player last season.

That’s a lot of baseball… what’s the point? Simply put, I think baseball’s ability to present data in a digestible manner has potential for asset management. Consider expenses as an example. A common presentation is to present expense ratios directly, as Dimensional Fund Advisors does here:

DFA Expense Ratio

But how much does that really help? Sure knowledgeable investors and advisors have a good notion of what is high or low when it comes to fees, but not in any systematic or (frequently) very precise way.

Providing category or peer data alongside that, as Morningstar and some managers do, certainly helps. But even there an investor or advisor is left to mentally digest the scale of the difference.

So what if data like expense ratios was represented via a more comprehensive statistic that combines product-specific and category-average data into a single number scaled against 100, much like wRC+? Let’s call it the “Expense Index.” For the DFA fund noted above, the Expense Index would be 38, immediately communicating that the fund’s expense ratio is 62% lower than its peer group.

I can envision many applications for this type of normalized data. Of course there are questions. For example, without an external / regulatory requirement would firms want to be so direct, especially with data like fees? I mean, many would want to avoid showing an Expense Index of 150.

So there is some thinking to be done on what information is most conducive to such an approach. Even so, simplifying and providing context around data strikes me as an opportunity worth of more exploration.

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.

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.