What We Do, Might and Don't Know About Funds
VIDEO: Morningstar Vice President of Research John Rekenthaler takes a look at indicators of future fund performance and compares investor experiences
Speaking at the Morningstar UK Investment Conference earlier this month, Morningstar Vice President of Research John Rekenthaler explained what we do know, might know, and don't yet know about funds and the factors indicating their future performance. He also discussed the investor experience on both sides of the Atlantic and highlighted how US investors are more fee conscious than their European cousins. For more on his presentation and presentations from a broad range of investment luminaries at the Morningstar Investment Conference, read my blog from Day 1 and Day 2.
Transcript
Holly Cook: We’re here at the Morningstar Investment Conference. Joining me is John Rekenthaler, who is Morningstar’s Vice President of Research. John, thanks for joining me.
John Rekenthaler: Pleasure.
Cook: So you just gave us a presentation, the title of which was ‘What we do know about funds, what we might know and what we don’t know,’ can you start maybe by trying to summerise what we do know?
Rekenthaler: Oh the small part!
[Laughs]
Actually there are a fair amount of things that we do know by now about mutual funds and this is true globally. We know that there’s some persistence in performance, not a lot, but some where, in general, past performers tend to be somewhat more successful going forward. That holds particularly true with the losers—you really don’t want to be associated with the loser fund, they have a strong tendency to be losers looking forward. We know costs are key. We know that funds actually perform pretty well before expenses, they tend to outperform their relevant indexes. But after expenses, most actively run funds will trail by a little bit. Those would be the main things that we do know.
What we might know would be that stewardship is important—I actually think this is what we do know. By stewardship I mean, aside from the issue of total returns of a fund: the management quality, how they’ve treated investors, how their compensation structures are. Basically the things you would look at as a corporate stock holder. These things are important as well. We’ve run some studies, we’ve done a lot of work in the United States, we just haven’t generalised it yet and it seems that stewardship is an important indicator of future performance.
In terms of what we don’t know, that's a big long list, but I’d start with trading costs. There’s a lot more work to be done on when [do] funds become too big? When are they moving the markets? When should they be shut down? And there’s really just not good data on that.
Cook: It seems like investors tend to make quite a lot of bad decisions—we need all the help that we can get right now. So from your research, and there’s a lot more research been done in the US than the UK, can you tell us something about the investor experience in the UK versus the more developed market in the US?
Rekenthaler: I think the investor experience is pretty much the same globally, which is as a general rule investors chase their tails too much, they buy what’s outperformed over the last few years and they buy into ‘hot’ areas and then they sell when they become cold. That is something that we have statistically shown through the numbers and this is something we call investor returns in the States. And from what we can see that holds true globally. The one thing that is different in the US is that US investors are more fee conscious than any other investors in the world. US funds not only have the lowest fees of any investor in the world. But right now American investors are only buying the cheapest of those funds, and you see it across the growth of the exchange-traded fund market as well, which is also a sign of the very cost conscious.
Cook: This is something I think that we’re becoming more aware of in the UK that... Vanguard are coming in with lower costs, so that is a development that we are seeing.
Rekenthaler: Yes, and I wouldn’t be surprised to see it intensify. 10-15 years ago in the US there was nowhere near this amount of focus on fees. That has been the biggest change in the US market in the last decade. 10 years ago people were more cost neutral. Now, whether it’s the individual investor, the financial adviser or the institution, (the institutions are probably there first), they’re just very cheap.
Cook: Thanks very much for clarifying that for us and thank you for joining us.
Rekenthaler: Sure.
Cook: For Morningstar, I’m Holly Cook, thanks for watching.
