mutual funds

Are the Barron’s Rankings Bad for Asset Managers?

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

Last week Barron’s published their annual fund family rankings. As they typically do, Barron’s focuses first and mostly on one-year results, noting that most of this year’s winners “rose from the very bottom of the 2011 list”.

Did they ever. Only one of the top 10 firms from last year remained in the top 10 this year. Putnam finished first a year after placing 57th.

Putnam touted their #1 ranking in Barron's on their Web site.

Putnam touted their #1 ranking in Barron’s on their Web site.

The Barron’s list gets a lot of attention and the winners tend to use the results as promotional fuel. But as I digested the results, I started to wonder if the Barron’s rankings do more harm than good for fund families.

The volatility of the list is one damaging aspect. Besides the short-term shuffling, this year saw 2011’s 10-year winner drop all the way to 15th in this year’s 10-year rankings.

I think it’s entirely plausible that these results can lead people to question if it’s possible for managers to have a sustainable advantage. At a time when actively-managed equity products in particular have hemorrhaged money, painting a picture of randomness is far from favorable.

The other problematic aspect of the rankings is the overwhelming emphasis placed on one-year results. Managers almost universally preach long-term thinking – that it is market cycles that matter, not days or weeks or months.

Yet, when given a chance to focus on positive one-year results, many of the firms embrace that opportunity to the fullest. Most of the top 10 have done something to trumpet the Barron’s list, something that I see as counter to a central tenet of their overall marketing and brand.

I’m not saying that firms shouldn’t be proud of good performance. But I think that to a certain degree it should be promoted in the consistent wrapper of long-term thinking and results.

David Swensen and the Reality of Past Performance

Posted by Mike McLaughlin on Aug 15, 2011, in Thoughts , tagged with , , , , ,

If you read our blog, by now you’ve probably also read David Swensen’s op-ed from the Saturday New York Times. There’s a lot in there worthy of discussion, but one paragraph in particular got a strong reaction from me:

Mutual fund companies, retail brokers and financial advisers aggressively market funds awarded four stars and five stars by Morningstar … But the rating system merely identifies funds that performed well in the past; it provides no help in finding future winners. Nevertheless, investors respond to industry come-ons and load up on the most “stellar” offerings.

Let’s all say it together: past performance is not predictive of future results. True in investing? Yes. In life? No.

The reason David Swensen gets to write an op-ed for the New York Times and lead the Yale endowment is because of what he’s done in the past. Looking at the track record of anything is the most intuitive evaluation barometer we have. Ignoring it is neither natural nor logical.

This doesn’t mean the issue Swensen raises – investors unsuccessfully chasing performance – isn’t real. I just think he’s angrily, unfairly, and incorrectly casting blanket blame on mutual fund marketers and financial advisors, who generally believe in what they’re doing and try to do right by their customers and themselves.

The real enemy here for Swensen is human nature. It’s in our nature to be emotional and overconfident, and compensating for these realities will require a lot more than broad-stroke, ham-handed criticisms of an entire industry.

Advisors are Less Willing to Compromise with Alternatives

Posted by Mike McLaughlin on Mar 10, 2011, in Thoughts , tagged with , ,

Scott Welch of Fortigent recently wrote an interesting article (FundFire, subscription required) about how the mentality of high-net worth individuals has changed toward alternative investments.  The big takeaway is his belief that retail-oriented, liquid alternative products will take significant market share from traditional hedge funds and fund-of-funds.

Turning toward advisors’ dealings with clients, Scott says:

An important question advisors can ask high-net-worth clients is, What is an acceptable trade-off between performance, liquidity, leverage and transparency?

A good question, but I don’t think this is the precise question to ask for two reasons:

  1. Performance isn’t part of the tradeoff equation anymore.  Hedge funds underperformed the broader markets in 2010 and had a slow start to 2011.  The time of assumed outperformance of limited partnerships compared to more liquid vehicles is passing.

  2. Without home-run performance, the other variables become non-negotiables.  Lousy liquidity terms?  Poor transparency?  Advisors will just take a pass.

These points reinforce what Scott is getting at – alternative products in retail packaging have huge potential.  Advisors are not going to want to choose among performance, liquidity, leverage, and transparency.  They’re going to want it all.

Active vs. Passive Management Debate Rises Again

Posted by Mike McLaughlin on Jan 21, 2011, in Thoughts , tagged with , , , ,

We’ve been asked to address the evergreen debate of active management vs. passive management with several clients of late.  Why?  Many firms with actively-managed mutual funds are experiencing challenges in specific parts of their product lineups (e.g., emerging markets, domestic large cap, etc.), leaving Sales and Marketing execs to answer:

  • How should our wholesalers handle the discussion with an advisor who is using (or considering) index products?
  • How can we counter an advisor’s move toward passive vehicles in our print/online messages?

Over the next week, we’ll use the blog to cover some of the answers we’ve come up with, including:

  • The one question wholesalers should ask advisors who say they use passively-managed products
  • The underlying complexity of investment indices
  • The sometimes imperfect construction of indexed investments

We’ll also cite some of the better research-driven arguments we’ve seen that can help distributors of actively-managed products with this challenge.  Stay tuned…

J. P. Morgan Funds and Stealth Price Marketing

Posted by Mike McLaughlin on Oct 25, 2010, in Thoughts , tagged with , ,

We said three posts but couldn’t resist a quick fourth on price competition.  Click to read Part 1, Part 2, and Part 3.

To close off the series of posts on price competition, an interesting tidbit.  Check out the sponsored links in the Google results for “low cost mutual funds”.*

At the top you’ll see Vanguard, T. Rowe Price, and Fidelity.  No surprises there.   Now look on the right side.  The name that jumps out to me:  J.P. Morgan Funds.  The firm has many competitively-priced offerings, but never before have I seen them overtly market themselves as a low-cost provider.  The sponsored link caught me off-guard.

Looking further, the firm makes no mention of pricing or fees anywhere in the content about the firm on its Web site.  This makes me suspect that J. P. Morgan is doing some “test and learn” when it comes to sponsored links.

However, there’s the possibility that this represents a little stealth, price-centric marketing by J.P. Morgan.  If so, it’s another interesting way to inject price into marketing strategies.

* I repeated the same search 20 times on 10/25/10 and J. P. Morgan Funds appeared in the sponsored links 19 times.  The sponsored results will change over time.