The document discusses how investors are strongly influenced by Morningstar fund ratings, preferring highly-rated 4-5 star funds. However, the ratings have little predictive power for future performance. The ratings act as a heuristic for investors but can lead to poor decisions due to anchoring bias, where the initial rating biases estimates of future performance. While intuitive, higher ratings do not necessarily mean better future returns. Understanding how the ratings can bias decisions may help improve investment choices.
This document summarizes key concepts from a presentation on investing myths and truths. It discusses four common investing myths: stock picking ability, using past performance to predict future returns, market timing, and overlooking costs. It then introduces the concept of free market portfolio theory as an evidence-based alternative grounded in decades of academic research. Free market portfolio theory incorporates the ideas that free markets generally price assets correctly, modern portfolio theory principles of diversification, and the three-factor model for explaining returns.
In a lower expected return environment, should we just accept lower withdrawal rates?
In this presentation, we outline 8 simple ideas that when used together can potentially help make up the return gap.
Combining unconstrained and tactical investment strategies to seek hedging, equity-like, and absolute-return style investment exposure.
Explores how to combine tactical equity, minimum volatility, managed futures, risk parity, and other approaches.
Newfound Research was founded in 2008 based on the premise of capital preservation for investors. The company believes in portfolio processes that are simple, consistent, and thoughtfully designed, with managing risk being paramount. Newfound Research focuses on defensive, simple, consistent, and thoughtful investment philosophies and strategies. The documents provides an overview of Newfound Research's investment philosophy and approach to risk management. It also discusses concepts like asset bubbles, bond valuations, equity valuations, and the benefits of diversification in periods of low expected future returns for traditional stock and bond portfolios.
How effective is your method of managing portfolio risk? We compare and contrast different approaches – including fixed income, managed futures, low volatility equities, and tactical – to explore the relative protection they can deliver versus the return drag they can create.
JP Morgan Prime Brokerage 2013 Hedge Fund Terms AnalysisBrian Shapiro
The document analyzes the terms of 546 hedge funds in 2013, including redemption terms, lock-up periods, fees, and fund sizes. Some key findings are:
- The most common redemption term is quarterly with a 90 day notice period (16% of funds). Monthly redemptions with 30 days notice are also popular (15% of funds).
- Over half (51%) of funds have quarterly liquidity. Credit and relative value funds most commonly have quarterly redemptions.
- Nearly half (47.4%) of all funds have some type of lock-up period. Credit funds most often have lock-ups (71.4%), usually hard lock-ups of 1
The document discusses three dimensions of expected stock returns:
1) Company size - Small company stocks tend to have higher expected returns than large company stocks over time.
2) Company price - Lower-priced "value" stocks tend to have higher expected returns than higher-priced "growth" stocks over time.
3) Equity market - Stocks tend to have higher expected returns than fixed income investments like bonds over time.
The document discusses diversification across different asset classes and geographic regions. It presents 5 model portfolios with varying allocations to US and international stocks and bonds. The most diversified portfolio (Portfolio 5) allocates 30% to international stocks, 7.5% to several US stock size and style factors, and 40% to bonds. Tables show the annual returns and volatility of returns for each model portfolio from 1998-2012. The most diversified portfolio had the highest annualized return of 7.02% and second highest standard deviation of returns of 13.68%.
This document summarizes key concepts from a presentation on investing myths and truths. It discusses four common investing myths: stock picking ability, using past performance to predict future returns, market timing, and overlooking costs. It then introduces the concept of free market portfolio theory as an evidence-based alternative grounded in decades of academic research. Free market portfolio theory incorporates the ideas that free markets generally price assets correctly, modern portfolio theory principles of diversification, and the three-factor model for explaining returns.
In a lower expected return environment, should we just accept lower withdrawal rates?
In this presentation, we outline 8 simple ideas that when used together can potentially help make up the return gap.
Combining unconstrained and tactical investment strategies to seek hedging, equity-like, and absolute-return style investment exposure.
Explores how to combine tactical equity, minimum volatility, managed futures, risk parity, and other approaches.
Newfound Research was founded in 2008 based on the premise of capital preservation for investors. The company believes in portfolio processes that are simple, consistent, and thoughtfully designed, with managing risk being paramount. Newfound Research focuses on defensive, simple, consistent, and thoughtful investment philosophies and strategies. The documents provides an overview of Newfound Research's investment philosophy and approach to risk management. It also discusses concepts like asset bubbles, bond valuations, equity valuations, and the benefits of diversification in periods of low expected future returns for traditional stock and bond portfolios.
How effective is your method of managing portfolio risk? We compare and contrast different approaches – including fixed income, managed futures, low volatility equities, and tactical – to explore the relative protection they can deliver versus the return drag they can create.
JP Morgan Prime Brokerage 2013 Hedge Fund Terms AnalysisBrian Shapiro
The document analyzes the terms of 546 hedge funds in 2013, including redemption terms, lock-up periods, fees, and fund sizes. Some key findings are:
- The most common redemption term is quarterly with a 90 day notice period (16% of funds). Monthly redemptions with 30 days notice are also popular (15% of funds).
- Over half (51%) of funds have quarterly liquidity. Credit and relative value funds most commonly have quarterly redemptions.
- Nearly half (47.4%) of all funds have some type of lock-up period. Credit funds most often have lock-ups (71.4%), usually hard lock-ups of 1
The document discusses three dimensions of expected stock returns:
1) Company size - Small company stocks tend to have higher expected returns than large company stocks over time.
2) Company price - Lower-priced "value" stocks tend to have higher expected returns than higher-priced "growth" stocks over time.
3) Equity market - Stocks tend to have higher expected returns than fixed income investments like bonds over time.
The document discusses diversification across different asset classes and geographic regions. It presents 5 model portfolios with varying allocations to US and international stocks and bonds. The most diversified portfolio (Portfolio 5) allocates 30% to international stocks, 7.5% to several US stock size and style factors, and 40% to bonds. Tables show the annual returns and volatility of returns for each model portfolio from 1998-2012. The most diversified portfolio had the highest annualized return of 7.02% and second highest standard deviation of returns of 13.68%.
1) Asset allocation involves dividing investments among different asset classes like stocks, bonds, and cash equivalents to gain exposure to rotating market leaders and help reduce volatility.
2) Maintaining a balanced mix of assets tailored to an individual's goals, time horizon, and risk tolerance can potentially increase returns compared to holding single assets.
3) Asset allocation strategies need periodic rebalancing to maintain the intended risk level as market conditions and individual circumstances change over time.
BGEO Group PLC is a banking conglomerate based in Georgia that provides banking, healthcare, insurance, and other services. Morningstar's quantitative analysis assigns BGEO a narrow moat, overvalued rating, and high uncertainty. The company has strong financial health with a return on equity of 18.2%, assets/equity ratio of 6.0, and distance to default score of 0.9.
The investment philosophy focuses on efficient market investing through portfolio design and implementation that targets dimensions of higher expected returns like value, size, and profitability. It believes prices reflect all available information and aims to add value not by forecasting but by pursuing risk premia in a low-cost, diversified portfolio. Traditional active management often relies on forecasting and generates higher costs without consistent outperformance, while index funds provide little flexibility.
Adding listed real estate to an unlisted portfolio what are the risk and ret...Consiliacapital
Adding listed real estate to an unlisted real estate portfolio can enhance returns while providing increased liquidity. Analyzing UK unlisted and global listed real estate fund data from 2003-2013, the study found:
1) Adding a 30% weighting to listed real estate would have increased absolute returns of the unlisted portfolio by 30% over 10 years and by 22% during a period of rising property values.
2) During the global financial crisis, including a 30% listed weighting led to only a marginal 2.2% decrease in returns, representing a small cost compared to the increased liquidity.
3) Breaking the period into different market conditions, the addition of listed real estate consistently enhanced returns except during
The document provides information about Franklin Templeton mutual funds, including the Templeton Global Bond Fund. It summarizes the fund's investment strategy, benefits, and results. The strategy involves active management across global fixed income markets. Benefits include diversification and historically strong performance, especially during downturns in the stock market. Results shown include top fund manager awards, positive returns, and lower volatility compared to stock market indexes over the long term.
Print: http://bit.ly/1UVS5jB
Near the end of each calendar year, mutual insurance companies declare their dividend interest rates (DIRs) on participating whole life (WL) insurance policies for the following year.
Our latest M Intelligence piece provides information on the elements that drive changes in DIRs—as supported by historical DIR results, insurance company asset allocations, and investment returns.
BoyarMiller Breakfast Forum: The Current State of the Capital Markets 2012BoyarMiller
This document provides a summary of a presentation by AllianceBernstein L.P. on the current state of the capital markets. It discusses the following key points:
- Global stock returns have been up in recent years despite shifting investor sentiment favoring safety. However, earnings growth is slowing.
- Interest rates remain near generational lows due to economic anxieties. Global economic growth is expected to remain slow with challenges from austerity measures and slowdowns in countries like China and Brazil.
- The European sovereign debt crisis has no quick solution. Deeper fiscal integration is needed but national economic situations vary significantly across countries in the euro area.
- In the US, consumers have reduced debt burdens and job
Investing in a Rising Rate Environment - Dec. 2011RobertWBaird
- Rising interest rates can negatively impact bond prices in the short-term but a focus on total return, which includes interest income, provides a more accurate picture of bond performance over time.
- An analysis of periods from 1994-2006 when the Federal Reserve raised rates found that while bond prices fell in the majority of months, interest income was positive every month and total returns were positive in 64% of months.
- Diversifying across different types of bonds can help mitigate the effects of rising rates as different bond segments perform variably depending on economic conditions. Professional bond managers employ strategies to offset negative impacts and maximize total returns.
The document provides 5 investing principles based on a presentation about lessons learned. Principle 1 discusses that every investment has risks, even cash, as investors flocked to cash during volatile periods but it provided little return over the long run after accounting for inflation. Principle 2 notes that while most asset classes declined in 2008, a diversified portfolio still worked over the full market cycle from 2000-2009. Principle 3 explains that not all bonds or bond funds perform the same way. Principle 4 asserts that stocks have generally outperformed over the long run. Principle 5 advocates for including international stocks rather than avoiding foreign markets.
This document discusses methods for estimating key inputs used to calculate the weighted average cost of capital (WACC) for a company. It evaluates different approaches to estimating beta, the risk-free rate, and equity market risk premium based on regression analysis of stock return data. For the company in question, CSR, it selects a beta of 1.15 based on 3 years of weekly return data. The risk-free rate is taken as the 10-year government bond yield of 3.37% geometrically averaged over 4 years. The equity risk premium is estimated to be 8.88% based on the accumulation index return over the same period. This yields an estimated cost of equity of 13.58% and overall WACC cannot be
4113151:SaroFinalAssignment-
Investing.docx
by Svetlana Saro
Submission date: 29-Jun-2019 06:00PM (UTC-0400)
Submission ID: 1147968142
File name: 6-d73b-4a7d-ad1c-f ac44aea1901_SaroFinalAssignment- Investing.docx (248.75K)
Word count: 1609
Character count: 8669
98%
SIMILARITY INDEX
13%
INTERNET SOURCES
2%
PUBLICATIONS
98%
STUDENT PAPERS
1 98%
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4113151:SaroFinalAssignment-Investing.docxby Svetlana Saro4113151:SaroFinalAssignment-Investing.docxORIGINALITY REPORTPRIMARY SOURCES4113151:SaroFinalAssignment-Investing.docx
Investor
profile
questionnaire
Investor profile questionnaire
Find a suitable investment strategy
Your investing strategy should reflect the kind of investor you are—your personal investor profile. This quiz will help you
determine your profile and then match it to an investment strategy that’s designed for investors like you.
The quiz measures two key factors:
YOUR TIME HORIZON
When will you begin withdrawing money from your account and at what rate? If it’s many years away, there may be
more time to weather the market’s inevitable ups and downs and you may be comfortable with a portfolio that has a
greater potential for appreciation and a higher level of risk.
YOUR RISK TOLERANCE
How do you feel about risk? Some investments fluctuate more dramatically in value than others but may have the
potential for higher returns. It’s important to select investments that fit within your level of tolerance for this risk
How to make your choice
Your time horizon
Your risk .
- The document provides data from an annual global trust survey conducted in 2022 across 32,000 respondents in 28 countries.
- Key findings from the survey include a collapse in economic optimism around the world and business emerging as the only institution seen as competent and ethical.
- There are large divides in trust based on income, with up to a 23 point gap between those in the top and bottom income quartiles in some countries.
- Government and media are seen as sources of false or misleading information and fuel a cycle of distrust, while trust in local communities and individuals remains higher.
New perspectives on asset class investingRobUgiansky
This document discusses various investment strategies including active and passive investing. It notes that most active managers underperform their benchmarks over time. It also discusses the benefits of asset class investing over index investing, including lower costs, improved tax efficiency, increased diversification, better risk exposure, and potentially better long-term performance. Charts show that a diversified portfolio following an asset class approach outperformed the S&P 500 since 2000 and was less volatile, and held up better in the face of withdrawals.
ASSET ALLOCATION AND DIVERSIFICATION STRATEGIES:KEY FACTORS TO CONSIDER - Ste...IFG Network marcus evans
Presentation delivered by Keynote Speaker Steven Skancke, Chief Investment Officer, KEEL POINT ADVISORS at the IFG Wealth Management Forum Spring 2016 held in Scottsdale AZ
Redwood unconstrained bond presentationJeff Bennett
This document discusses the Redwood Unconstrained Bond Fund managed by Reams Asset Management. It provides an overview of the fund's investment approach, experienced management team, disciplined investment process focused on risk management, and performance track record spanning different rate environments. Key points are that the fund offers a long-term, small asset, pure unconstrained strategy that hunts for spread versus chasing yield, providing non-correlating returns to complement traditional fixed income allocations.
The document discusses strategies for creating an investment portfolio based on Nobel Prize-winning academic research. It recommends structuring portfolios to take advantage of factors like company size, relative price, and profitability that have been shown to increase returns. Specifically, it suggests investing more in small and value stocks, as both have higher returns than large or growth stocks over the long run. The document also provides examples of model portfolios that diversify across global stock and bond index funds targeting these factors.
Smartsheet Inc. provides cloud-based enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations. The company offers Dashboards for real-time visibility into the status of work to align individuals, managers, and executives.
Based on the Smartsheet Inc stock forecasts from 13 analysts, the average analyst target price for Smartsheet Inc is USD 63.50 over the next 12 months. Smartsheet Inc’s average analyst rating is Strong Buy. Stock Target Advisor’s own stock analysis of Smartsheet Inc is Bearish, which is based on 1 positive signals and 3 negative signals. At the last closing, Smartsheet Inc’s stock price was USD 37.76. Smartsheet Inc’s stock price has changed by +4.22% over the past week, -13.51% over the past month and -40.00% over the last year.
This document provides performance updates for private equity benchmarks and selected public pension funds' private equity portfolios as of March 2013. It includes 1, 3, 5, and 10-year returns for various private equity indexes from Cambridge Associates, Preqin, PitchBook, and ILPA, showing private equity outperforming public markets over the long term. It also displays 1, 3, 5, and 10-year time-weighted returns for 17 pension funds, with median returns outperforming public market indexes like the S&P 500 over 3, 5, and 10 years. An appendix describes the private equity benchmarks and provides more pension fund performance details.
- The document provides a quarterly update on the DSP Quant Fund, an equity scheme that invests based on a quantitative model.
- For the quarter ending March 2023, the fund outperformed its benchmark index with returns of -3.9% compared to the index's -5.7%.
- Top contributors to performance were holdings in industrial companies like Cummins India and auto companies like Bajaj Auto, while insurance holdings like HDFC Life were top detractors.
This document provides an overview of the DSP Top 100 Equity Fund large cap fund. It discusses the fund manager's core beliefs of valuing stocks intrinsically and recognizing uncertainty. It highlights why equity provides higher returns than inflation over the long run. The fund focuses on large caps for their lower volatility and sector leaders. Though most active funds underperform, this fund maintains a high active share and concentrated portfolio. The portfolio has conservative valuations and uses factor models for screening.
The Dynamic Implications of Sequence Risk on a Distribution Portfolio Journal...Better Financial Education
A practical method for advisers to measure exposure to sequence risk is through evaluation of the current probability of failure rate (which I've later renames as iteration failure rate to reflect measurement of the Monte Carlo simulation rather than the plan itself - two different things). This paper lead to a deeper investigation of failure rates thus leading to two subsequent papers discovering the three-dimensional nature of simulations over various time periods and allocations, as well as application of longevity to the simulation modeling.
Can You Pick The Next Winner?
Asset Class Performance 2002‐2021 of various global markets.
Pick any color in any earlier year and see what
happened in any later year. Bottom go up and top go down randomly.
*Note the 20 year results also
change asset class positions
over the years (don't predict
the future).
More Related Content
Similar to Whitepapper morningstar heuristic_rev 2 revlrf
1) Asset allocation involves dividing investments among different asset classes like stocks, bonds, and cash equivalents to gain exposure to rotating market leaders and help reduce volatility.
2) Maintaining a balanced mix of assets tailored to an individual's goals, time horizon, and risk tolerance can potentially increase returns compared to holding single assets.
3) Asset allocation strategies need periodic rebalancing to maintain the intended risk level as market conditions and individual circumstances change over time.
BGEO Group PLC is a banking conglomerate based in Georgia that provides banking, healthcare, insurance, and other services. Morningstar's quantitative analysis assigns BGEO a narrow moat, overvalued rating, and high uncertainty. The company has strong financial health with a return on equity of 18.2%, assets/equity ratio of 6.0, and distance to default score of 0.9.
The investment philosophy focuses on efficient market investing through portfolio design and implementation that targets dimensions of higher expected returns like value, size, and profitability. It believes prices reflect all available information and aims to add value not by forecasting but by pursuing risk premia in a low-cost, diversified portfolio. Traditional active management often relies on forecasting and generates higher costs without consistent outperformance, while index funds provide little flexibility.
Adding listed real estate to an unlisted portfolio what are the risk and ret...Consiliacapital
Adding listed real estate to an unlisted real estate portfolio can enhance returns while providing increased liquidity. Analyzing UK unlisted and global listed real estate fund data from 2003-2013, the study found:
1) Adding a 30% weighting to listed real estate would have increased absolute returns of the unlisted portfolio by 30% over 10 years and by 22% during a period of rising property values.
2) During the global financial crisis, including a 30% listed weighting led to only a marginal 2.2% decrease in returns, representing a small cost compared to the increased liquidity.
3) Breaking the period into different market conditions, the addition of listed real estate consistently enhanced returns except during
The document provides information about Franklin Templeton mutual funds, including the Templeton Global Bond Fund. It summarizes the fund's investment strategy, benefits, and results. The strategy involves active management across global fixed income markets. Benefits include diversification and historically strong performance, especially during downturns in the stock market. Results shown include top fund manager awards, positive returns, and lower volatility compared to stock market indexes over the long term.
Print: http://bit.ly/1UVS5jB
Near the end of each calendar year, mutual insurance companies declare their dividend interest rates (DIRs) on participating whole life (WL) insurance policies for the following year.
Our latest M Intelligence piece provides information on the elements that drive changes in DIRs—as supported by historical DIR results, insurance company asset allocations, and investment returns.
BoyarMiller Breakfast Forum: The Current State of the Capital Markets 2012BoyarMiller
This document provides a summary of a presentation by AllianceBernstein L.P. on the current state of the capital markets. It discusses the following key points:
- Global stock returns have been up in recent years despite shifting investor sentiment favoring safety. However, earnings growth is slowing.
- Interest rates remain near generational lows due to economic anxieties. Global economic growth is expected to remain slow with challenges from austerity measures and slowdowns in countries like China and Brazil.
- The European sovereign debt crisis has no quick solution. Deeper fiscal integration is needed but national economic situations vary significantly across countries in the euro area.
- In the US, consumers have reduced debt burdens and job
Investing in a Rising Rate Environment - Dec. 2011RobertWBaird
- Rising interest rates can negatively impact bond prices in the short-term but a focus on total return, which includes interest income, provides a more accurate picture of bond performance over time.
- An analysis of periods from 1994-2006 when the Federal Reserve raised rates found that while bond prices fell in the majority of months, interest income was positive every month and total returns were positive in 64% of months.
- Diversifying across different types of bonds can help mitigate the effects of rising rates as different bond segments perform variably depending on economic conditions. Professional bond managers employ strategies to offset negative impacts and maximize total returns.
The document provides 5 investing principles based on a presentation about lessons learned. Principle 1 discusses that every investment has risks, even cash, as investors flocked to cash during volatile periods but it provided little return over the long run after accounting for inflation. Principle 2 notes that while most asset classes declined in 2008, a diversified portfolio still worked over the full market cycle from 2000-2009. Principle 3 explains that not all bonds or bond funds perform the same way. Principle 4 asserts that stocks have generally outperformed over the long run. Principle 5 advocates for including international stocks rather than avoiding foreign markets.
This document discusses methods for estimating key inputs used to calculate the weighted average cost of capital (WACC) for a company. It evaluates different approaches to estimating beta, the risk-free rate, and equity market risk premium based on regression analysis of stock return data. For the company in question, CSR, it selects a beta of 1.15 based on 3 years of weekly return data. The risk-free rate is taken as the 10-year government bond yield of 3.37% geometrically averaged over 4 years. The equity risk premium is estimated to be 8.88% based on the accumulation index return over the same period. This yields an estimated cost of equity of 13.58% and overall WACC cannot be
4113151:SaroFinalAssignment-
Investing.docx
by Svetlana Saro
Submission date: 29-Jun-2019 06:00PM (UTC-0400)
Submission ID: 1147968142
File name: 6-d73b-4a7d-ad1c-f ac44aea1901_SaroFinalAssignment- Investing.docx (248.75K)
Word count: 1609
Character count: 8669
98%
SIMILARITY INDEX
13%
INTERNET SOURCES
2%
PUBLICATIONS
98%
STUDENT PAPERS
1 98%
Exclude quotes Of f
Exclude bibliography Of f
Exclude matches Of f
4113151:SaroFinalAssignment-Investing.docx
ORIGINALITY REPORT
PRIMARY SOURCES
Submitted to Marquette High School
Student Paper
4113151:SaroFinalAssignment-Investing.docx
PAGE 1
PAGE 2
Article Error You may need to use an article bef ore this word.
Prep. You may be using the wrong preposition.
Missing "," Review the rules f or using punctuation marks.
Article Error You may need to remove this article.
PAGE 3
Proofread This part of the sentence contains an error or misspelling that makes your meaning
unclear.
Hyph. Review the rules f or using punctuation marks.
Missing "," Review the rules f or using punctuation marks.
PAGE 4
Sp. This word is misspelled. Use a dictionary or spellchecker when you proof read your work.
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Prep. You may be using the wrong preposition.
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4113151:SaroFinalAssignment-Investing.docxby Svetlana Saro4113151:SaroFinalAssignment-Investing.docxORIGINALITY REPORTPRIMARY SOURCES4113151:SaroFinalAssignment-Investing.docx
Investor
profile
questionnaire
Investor profile questionnaire
Find a suitable investment strategy
Your investing strategy should reflect the kind of investor you are—your personal investor profile. This quiz will help you
determine your profile and then match it to an investment strategy that’s designed for investors like you.
The quiz measures two key factors:
YOUR TIME HORIZON
When will you begin withdrawing money from your account and at what rate? If it’s many years away, there may be
more time to weather the market’s inevitable ups and downs and you may be comfortable with a portfolio that has a
greater potential for appreciation and a higher level of risk.
YOUR RISK TOLERANCE
How do you feel about risk? Some investments fluctuate more dramatically in value than others but may have the
potential for higher returns. It’s important to select investments that fit within your level of tolerance for this risk
How to make your choice
Your time horizon
Your risk .
- The document provides data from an annual global trust survey conducted in 2022 across 32,000 respondents in 28 countries.
- Key findings from the survey include a collapse in economic optimism around the world and business emerging as the only institution seen as competent and ethical.
- There are large divides in trust based on income, with up to a 23 point gap between those in the top and bottom income quartiles in some countries.
- Government and media are seen as sources of false or misleading information and fuel a cycle of distrust, while trust in local communities and individuals remains higher.
New perspectives on asset class investingRobUgiansky
This document discusses various investment strategies including active and passive investing. It notes that most active managers underperform their benchmarks over time. It also discusses the benefits of asset class investing over index investing, including lower costs, improved tax efficiency, increased diversification, better risk exposure, and potentially better long-term performance. Charts show that a diversified portfolio following an asset class approach outperformed the S&P 500 since 2000 and was less volatile, and held up better in the face of withdrawals.
ASSET ALLOCATION AND DIVERSIFICATION STRATEGIES:KEY FACTORS TO CONSIDER - Ste...IFG Network marcus evans
Presentation delivered by Keynote Speaker Steven Skancke, Chief Investment Officer, KEEL POINT ADVISORS at the IFG Wealth Management Forum Spring 2016 held in Scottsdale AZ
Redwood unconstrained bond presentationJeff Bennett
This document discusses the Redwood Unconstrained Bond Fund managed by Reams Asset Management. It provides an overview of the fund's investment approach, experienced management team, disciplined investment process focused on risk management, and performance track record spanning different rate environments. Key points are that the fund offers a long-term, small asset, pure unconstrained strategy that hunts for spread versus chasing yield, providing non-correlating returns to complement traditional fixed income allocations.
The document discusses strategies for creating an investment portfolio based on Nobel Prize-winning academic research. It recommends structuring portfolios to take advantage of factors like company size, relative price, and profitability that have been shown to increase returns. Specifically, it suggests investing more in small and value stocks, as both have higher returns than large or growth stocks over the long run. The document also provides examples of model portfolios that diversify across global stock and bond index funds targeting these factors.
Smartsheet Inc. provides cloud-based enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations. The company offers Dashboards for real-time visibility into the status of work to align individuals, managers, and executives.
Based on the Smartsheet Inc stock forecasts from 13 analysts, the average analyst target price for Smartsheet Inc is USD 63.50 over the next 12 months. Smartsheet Inc’s average analyst rating is Strong Buy. Stock Target Advisor’s own stock analysis of Smartsheet Inc is Bearish, which is based on 1 positive signals and 3 negative signals. At the last closing, Smartsheet Inc’s stock price was USD 37.76. Smartsheet Inc’s stock price has changed by +4.22% over the past week, -13.51% over the past month and -40.00% over the last year.
This document provides performance updates for private equity benchmarks and selected public pension funds' private equity portfolios as of March 2013. It includes 1, 3, 5, and 10-year returns for various private equity indexes from Cambridge Associates, Preqin, PitchBook, and ILPA, showing private equity outperforming public markets over the long term. It also displays 1, 3, 5, and 10-year time-weighted returns for 17 pension funds, with median returns outperforming public market indexes like the S&P 500 over 3, 5, and 10 years. An appendix describes the private equity benchmarks and provides more pension fund performance details.
- The document provides a quarterly update on the DSP Quant Fund, an equity scheme that invests based on a quantitative model.
- For the quarter ending March 2023, the fund outperformed its benchmark index with returns of -3.9% compared to the index's -5.7%.
- Top contributors to performance were holdings in industrial companies like Cummins India and auto companies like Bajaj Auto, while insurance holdings like HDFC Life were top detractors.
This document provides an overview of the DSP Top 100 Equity Fund large cap fund. It discusses the fund manager's core beliefs of valuing stocks intrinsically and recognizing uncertainty. It highlights why equity provides higher returns than inflation over the long run. The fund focuses on large caps for their lower volatility and sector leaders. Though most active funds underperform, this fund maintains a high active share and concentrated portfolio. The portfolio has conservative valuations and uses factor models for screening.
Similar to Whitepapper morningstar heuristic_rev 2 revlrf (20)
The Dynamic Implications of Sequence Risk on a Distribution Portfolio Journal...Better Financial Education
A practical method for advisers to measure exposure to sequence risk is through evaluation of the current probability of failure rate (which I've later renames as iteration failure rate to reflect measurement of the Monte Carlo simulation rather than the plan itself - two different things). This paper lead to a deeper investigation of failure rates thus leading to two subsequent papers discovering the three-dimensional nature of simulations over various time periods and allocations, as well as application of longevity to the simulation modeling.
Can You Pick The Next Winner?
Asset Class Performance 2002‐2021 of various global markets.
Pick any color in any earlier year and see what
happened in any later year. Bottom go up and top go down randomly.
*Note the 20 year results also
change asset class positions
over the years (don't predict
the future).
This document presents data on annual stock market returns in the US from 1926 to 2021. It shows that the market had positive returns in 75% of years, and the average annualized return was 10.2%. However, nearly two-thirds of yearly returns were at least 10 percentage points above or below the average. It also notes that more than two-thirds of down years were followed by up years, such as the 5% loss in 2018 followed by a 30.4% gain in 2019. The document concludes that investors who can withstand short-term volatility and maintain a long-term perspective tend to be rewarded in the stock market.
Prototype software example of aging model incorporating both portfolio and lo...Better Financial Education
This first appeared in blog post that describes the graphs in more details
https://blog.betterfinancialeducation.com/sustainable-retirement/what-are-the-three-paradigms-of-retirement-planning/
Prototype software example of aging model incorporating both portfolio and longevity percentile statistics along with consumer spending trend line of “Real People” (which is not based here on spending percentile statistics, but on research averages). Starting balance $500,000 with $36,000 Social Security. Two simple graphs by age answer many retiree questions about potential future spending and balances. Creates a whole different discussion. Also illustrates why age 95 is a poor reference for planning since it doesn’t plan or consider aging into future ages from the beginning of retirement.
Finding the parallels between flying a jet and helping people
develop financial plans may be difficult for the average person, but for Larry R. Frank Sr., the similarities between these two activities are crystal clear.
A question of equilibrium - can there be more buyers than sellers? Or more se...Better Financial Education
Have you ever wondered who is buying if so many people are selling?
The notion that sellers can outnumber buyers on
down days doesn’t make sense. What the newscasters should say, of course, is that prices adjusted lower because would-be buyers weren’t prepared to pay
the former price.
What happens in such a case is either the would-be sellers sit on their shares or prices quickly adjust to the point where supply and demand come into balance and transactions occur at a price that both buyers
and sellers find mutually beneficial. Economists refer
to this as equilibrium.
The Happiness Equation as it relates to investing is an interrelationship between your perceptions and expectations of investing and events. How do you manage happiness when you can't manage the markets?
A mistake many inexperienced sailors make is not having a plan at all. They embark without a clear sense of their destination. And once they do decide, they often find themselves lost at sea in the wrong boat
with inadequate provisions.
Destination, contingencies when trouble comes up, course corrections, bad weather and more can happen on the journey. How do you properly prepare for sailing is much the same as investing.
When setting expectations,
it’s helpful to see the range of outcomes experienced
by investors historically. For example, how often have
the stock market’s annual returns actually aligned with
its long-term average? Better yet, how often are the markets positive?
This document outlines a general plan to address various financial issues in three phases: retirement income, lost survivor income, and estate planning. It lists possible sources of income or solutions for each phase, such as pensions, social security, retirement savings, life insurance, and trusts. The plan emphasizes putting solutions in writing, reviewing them periodically, and deciding on a plan by considering available resources that can only be used once.
The world is risky. The future is uncertain. And many of the decisions we make can have a pro-found impact on our future welfare. Risk cannot be eliminated, but it can be managed.
Blog post for further perspective http://wp.me/p2Oizj-I8 (scheduled to post 17 May 17).
Robo-advisor portfolios may be well diversified, they also contain construction gaps that should not be present in well-constructed portfolios.
Post discussing this in broader context schedule for 3 May 2017 http://wp.me/p2Oizj-HV
Robo-advisor portfolios may be well diversified, they also contain construction gaps that should not be present in well-constructed portfolios.
Post discussing this in broader context schedule for 3 May 2017 http://wp.me/p2Oizj-HV
This paper essentially demonstrates to academics and the profession that the current method of computing retirement income essentially arrives at a single solution applicable only to today; it does not model the future as currently interpreted. Our paper contrasts the difference between a calculation and a "multi-cast" simulation model.
Our research summary paper is published in the Journal of Financial Planning, Nov 2016. A link to the paper is available here "Combining Stochastic Simulations and Actuarial Withdrawals into One Model." ( http://bit.ly/2eLBUq9 )
Our working paper documenting our research project won the CFP® Board Best Research Paper Award at the 2016 Academy of Financial Services ( http://academyfinancial.org/ ) annual conference through an academic panel using a blind review process. "Certainty of Lifestyle: Contrasting a Simulation Over a Fixed Period versus Multiple Period Models" ( http://bit.ly/2dWtuNz )
In early Nov 2016, two blogs will post going into more insights from the research: Just where does the fear of outliving our money come from? Part I with link to Part II. ( http://wp.me/p2Oizj-H2 )
Investing makes it possible for many of us to achieve important lifetime goals, such as retirement. That’s why we employ an investment approach based on almost nine decades of data, analysis and research, insights from behavioral finance and close relationships with leading academics. There are four key concepts which play a vital role in the construction and management of our portfolios. Together, they add up to a distinctive long-term, approach we call Asset Class, or evidence-based, Investing
There are a number of different methods of calculating investment return, depending on what you’re trying to measure. Perhaps the most basic is total return, which is simply an investment’s ending balance expressed as a percent of its beginning balance. Total return includes capital appreciation and income components; it assumes all income distributions are reinvested. To annualize total return, you’ll need to calculate the compound annual return, which generally requires using a financial calculator. It’s important to keep in mind that you need a greater percentage gain after a losing year in order to break even on your investment.
More discussion of this when blog posts 22 Feb 2017 http://wp.me/p2Oizj-Hk
The article discusses an alternative approach to experiencing the costs of index reconstitution, called “Asset Classes,” which allow the fund manager broader leeway as to when to buy or sell, along with a broader range of holdings. This discussion begins in the section called “Decision Two: Indexing or Asset Class Investing?”
The Asset Class approach, also referred to by others as "Factor Investing," is based on what has become to be called “Evidence Based Investing” due to roots discussed in the linked "Factor Investing" article, that come from academic (peer reviewed and repeatable results) foundation that continues to this day.
My blog post discussing this article is scheduled to post 8 Feb 2017 http://wp.me/p2Oizj-Hh
There is a cost to indexing that most investors are unaware of. It is called “reconstitution.”
A blog post is scheduled for 8 Feb 2017 discussing this article.
http://wp.me/p2Oizj-Hh
Most people look at the benefits they would receive today when making their decision about when to begin receiving their Social Security. They also underestimate how long they may live unless they already have medical issues that are known to reduce longevity.
These two impulses cause many couples to begin their benefits too early which has an adverse effect for survivor income. When one person dies, the lowest benefit “goes away” and the highest benefit “remains.”
The article below explains how that works with a couple and their Social Security benefits at various ages.
An accounting information system (AIS) refers to tools and systems designed for the collection and display of accounting information so accountants and executives can make informed decisions.
Monthly Market Risk Update: June 2024 [SlideShare]Commonwealth
Markets rallied in May, with all three major U.S. equity indices up for the month, said Sam Millette, director of fixed income, in his latest Market Risk Update.
For more market updates, subscribe to The Independent Market Observer at https://blog.commonwealth.com/independent-market-observer.
13 Jun 24 ILC Retirement Income Summit - slides.pptxILC- UK
ILC's Retirement Income Summit was hosted by M&G and supported by Canada Life. The event brought together key policymakers, influencers and experts to help identify policy priorities for the next Government and ensure more of us have access to a decent income in retirement.
Contributors included:
Jo Blanden, Professor in Economics, University of Surrey
Clive Bolton, CEO, Life Insurance M&G Plc
Jim Boyd, CEO, Equity Release Council
Molly Broome, Economist, Resolution Foundation
Nida Broughton, Co-Director of Economic Policy, Behavioural Insights Team
Jonathan Cribb, Associate Director and Head of Retirement, Savings, and Ageing, Institute for Fiscal Studies
Joanna Elson CBE, Chief Executive Officer, Independent Age
Tom Evans, Managing Director of Retirement, Canada Life
Steve Groves, Chair, Key Retirement Group
Tish Hanifan, Founder and Joint Chair of the Society of Later life Advisers
Sue Lewis, ILC Trustee
Siobhan Lough, Senior Consultant, Hymans Robertson
Mick McAteer, Co-Director, The Financial Inclusion Centre
Stuart McDonald MBE, Head of Longevity and Democratic Insights, LCP
Anusha Mittal, Managing Director, Individual Life and Pensions, M&G Life
Shelley Morris, Senior Project Manager, Living Pension, Living Wage Foundation
Sarah O'Grady, Journalist
Will Sherlock, Head of External Relations, M&G Plc
Daniela Silcock, Head of Policy Research, Pensions Policy Institute
David Sinclair, Chief Executive, ILC
Jordi Skilbeck, Senior Policy Advisor, Pensions and Lifetime Savings Association
Rt Hon Sir Stephen Timms, former Chair, Work & Pensions Committee
Nigel Waterson, ILC Trustee
Jackie Wells, Strategy and Policy Consultant, ILC Strategic Advisory Board
Explore the world of investments with an in-depth comparison of the stock market and real estate. Understand their fundamentals, risks, returns, and diversification strategies to make informed financial decisions that align with your goals.
KYC Compliance: A Cornerstone of Global Crypto Regulatory FrameworksAny kyc Account
This presentation explores the pivotal role of KYC compliance in shaping and enforcing global regulations within the dynamic landscape of cryptocurrencies. Dive into the intricate connection between KYC practices and the evolving legal frameworks governing the crypto industry.
Budgeting as a Control Tool in Government Accounting in Nigeria
Being a Paper Presented at the Nigerian Maritime Administration and Safety Agency (NIMASA) Budget Office Staff at Sojourner Hotel, GRA, Ikeja Lagos on Saturday 8th June, 2024.
Calculation of compliance cost: Veterinary and sanitary control of aquatic bi...Alexander Belyaev
Calculation of compliance cost in the fishing industry of Russia after extended SCM model (Veterinary and sanitary control of aquatic biological resources (ABR) - Preparation of documents, passing expertise)
Dr. Alyce Su Cover Story - China's Investment Leadermsthrill
In World Expo 2010 Shanghai – the most visited Expo in the World History
https://www.britannica.com/event/Expo-Shanghai-2010
China’s official organizer of the Expo, CCPIT (China Council for the Promotion of International Trade https://en.ccpit.org/) has chosen Dr. Alyce Su as the Cover Person with Cover Story, in the Expo’s official magazine distributed throughout the Expo, showcasing China’s New Generation of Leaders to the World.
Fabular Frames and the Four Ratio ProblemMajid Iqbal
Digital, interactive art showing the struggle of a society in providing for its present population while also saving planetary resources for future generations. Spread across several frames, the art is actually the rendering of real and speculative data. The stereographic projections change shape in response to prompts and provocations. Visitors interact with the model through speculative statements about how to increase savings across communities, regions, ecosystems and environments. Their fabulations combined with random noise, i.e. factors beyond control, have a dramatic effect on the societal transition. Things get better. Things get worse. The aim is to give visitors a new grasp and feel of the ongoing struggles in democracies around the world.
Stunning art in the small multiples format brings out the spatiotemporal nature of societal transitions, against backdrop issues such as energy, housing, waste, farmland and forest. In each frame we see hopeful and frightful interplays between spending and saving. Problems emerge when one of the two parts of the existential anaglyph rapidly shrinks like Arctic ice, as factors cross thresholds. Ecological wealth and intergenerational equity areFour at stake. Not enough spending could mean economic stress, social unrest and political conflict. Not enough saving and there will be climate breakdown and ‘bankruptcy’. So where does speculative design start and the gambling and betting end? Behind each fabular frame is a four ratio problem. Each ratio reflects the level of sacrifice and self-restraint a society is willing to accept, against promises of prosperity and freedom. Some values seem to stabilise a frame while others cause collapse. Get the ratios right and we can have it all. Get them wrong and things get more desperate.
How to Invest in Cryptocurrency for Beginners: A Complete GuideDaniel
Cryptocurrency is digital money that operates independently of a central authority, utilizing cryptography for security. Unlike traditional currencies issued by governments (fiat currencies), cryptocurrencies are decentralized and typically operate on a technology called blockchain. Each cryptocurrency transaction is recorded on a public ledger, ensuring transparency and security.
Cryptocurrencies can be used for various purposes, including online purchases, investment opportunities, and as a means of transferring value globally without the need for intermediaries like banks.
2. 1 | Overcoming the Morningstar Heuristic
Investors have a strong preference for investing in mutual funds rated four stars and five stars by Morningstar,
as demonstrated by analyzing fund estimated net asset flows. Exhibit 1 displays the estimated net asset flows
from 2008 to 2012 of funds assigned a Morningstar Overall Rating. In addition, 85.90% of all estimated
net asset flows into rated United States mutual funds over that same time period were invested into four-
and five-star rated funds across all US category groups. The estimated net asset flows during 2008 further
demonstrate this preference for highly rated funds. During 2008, estimated net asset inflows of five-star
rated mutual funds reached $11.52B while all mutual funds with a star rating less than five saw a cumulative
estimated net asset outflow of $122.72B1
. A working paper by the Federal Reserve Bank of Atlanta also
notes a statistically significant positive relationship between increases in star ratings and increases in asset
flows into those rated funds, with changes in asset flows occurring immediately after a change in star rating2
.
The analysis of asset flows above clearly demonstrates evidence for investor’s preference for highly rated
funds but do the star ratings have any predictive power with respect to future fund performance?
“The fault, dear Brutus, is not in our stars, but in ourselves...”
— William Shakespeare, Julius Caesar
Past performance does not guarantee future results.
Data Source: Morningstar Direct. Estimated Net Asset flows plotted by star rated mutual fund. Non-rated funds are omitted.
$250,000
$200,000
$150,000
$100,000
$50,000
$0
-$50,000
-$100,000
-$150,000
1-star 2-star 3-star 4-star 5-star
Estimated Net
Flow 2008
Estimated Net
Flow 2009
Estimated Net
Flow 2010
Estimated Net
Flow 2011
Estimated Net
Flow 2012
Exhibit 1
Estimated
Asset Flows
2008-2012
($ millions)
3. 2 | Overcoming the Morningstar Heuristic
The Morningstar star rating was introduced in 1985 and “among other things, is designed to convey a
sense of how skillfully a fund has been managed3
.” The Morningstar star rating accomplishes this by rank-
ordering risk-adjusted mutual fund past performance within a category peer group, then — assuming a
normal distribution of risk-adjusted performance — awards five stars to funds in the top 10% of risk-
adjusted performance, four stars to funds in the next 22.5%, three stars to funds in the next 35%, two
stars to funds in the next 22.5%, and one star to funds in the bottom 10% of risk-adjusted performance.
The Morningstar star ratings are calculated over three-, five- and ten-year periods, with the Overall Rating
calculated as the weighted average of the number of stars received by a fund over the three-, five- and ten-
year periods. The weighted average Overall Rating is calculated according to the table below4
:
Months of Total Return Overall Rating
36-59 100% three-year rating
60-119 60% five-year rating
40% three-year rating
120+ 50% 10-year rating
30% five-year rating
20% three-year rating
Morningstar star ratings may fluctuate, however, due to a variety of factors, including: i) rounding the
rating to the nearest integer, ii) reaching a three-, five-, or 10-year milestone; iii) style drift; iv) inclusion
into a specific peer group.
Because of the star rating’s focus on past performance, Morningstar introduced the new Analyst Rating
system in November 2011 which evaluates funds based on People, Process, Parent, Performance and Price,
and awards ratings of Gold, Silver, Bronze, Neutral and Negative. This new rating system is intended
to supplement the star rating by analyzing a fund’s qualitative features to determine and communicate
Morningstar’s opinion of a fund’s future prospects5
. While the intent is to provide a more forward-looking
perspective6
, there is not enough data at this point to determine its effectiveness so the Overall Rating is the
focus of my analysis here.
A review of a sample of 560 equity mutual funds — all incepted prior to 1998 and domiciled and traded
in the United States from 1998 to 2012 — indicate that the Morningstar Overall Rating is not a good
indicator of future performance. Of the 80 mutual funds with five-star Overall Ratings during the 10-year
4. 3 | Overcoming the Morningstar Heuristic
period from 1998 to 2007, only 42.50% were able to outperform the S&P 500 during the following five-
year time period starting in 2008 on an annualized basis. Five-star funds during those same time periods
experienced an Overall Rating average decline of 1.94 stars, with only seven funds retaining that five-star
rating during the next five-year period. This contrasts with the performance of one-star funds: 52.94% of
one-star funds over the 10-year period starting in 1998 outperformed the S&P 500 during the five-year
time period starting in 2008 on an annualized basis, with an average overall rating increase of 1.82 stars.
Exhibit 2 shows the distribution of annualized returns from 2008-2012 on funds grouped by Overall
Rating from 1998 to 2007; the scatter plot clearly illustrates the lack of predictive power exhibited by the
Overall Rating.
Past performance does not guarantee future results.
Data Souce: Morningstar Direct.All rated mutual funds were sorted by star rating and their annualized returns were plotted.
Further examination of the Morningstar Overall Rating sheds more light on its inability to accurately
forecast future performance. Regression analysis was used to determine if a statistically significant
relationship existed between the Overall Rating in one year, the returns experienced by a fund over each of
the next three years and the annualized three-year return. The analysis was conducted from 2003 to 2009
using the Morningstar overall rating as the independent variable, and using the fund’s return in each of the
successive three years and the annualized three-year return as the dependent variable. The t-stats, p-values
and regression coefficients are provided on Exhibit 3 with the statistically significant results highlighted
(assuming a 95% confidence interval). The regression analyses showed statistically significant results in
only six instances out of 28. In those years where the rating showed a statistically significant relationship
Exhibit 2
Distribution
of Annualized
Returns
2008-2012
15%
10%
5%
0%
-5%
-10%
Number of Funds (Sorted by 1998-2007 Overall Rank)
3-star fund
5-star fund
2-star fund
4-star fund
1-star fund
AnnualizedReturn2008-2012
100 200 300 400 500 6000
5. 4 | Overcoming the Morningstar Heuristic
to future returns, the coefficient was negative, implying that, on average, an increase in the star rating
resulted in a decrease in future returns. The occurrence of a statistically significant relationship between
star ratings and future fund performance over each of the next three years was very sporadic and did not
show a positive relationship between the fund’s rating and its future performance. When conducted across
all time periods, the regression analysis showed no statistically significant relationship between the Overall
Rating and returns in each of the succeeding three years or the succeeding three-year annualized return.
Year of Overall
Rating
Year of Annual
Return
Coefficient T – Stat P-Value
2003 2004 0.00325127 1.6365 0.1021
2003 2005 0.0005246 0.3269 0.7438
2003 2006 2.689E-05 0.0139 0.9889
2003 3Yr.Annlzd. 04-06 0.00126162 1.0335 0.3017
2004 2005 0.00096469 0.5809 0.5615
2004 2006 0.00085651 0.4275 0.6691
2004 2007 -0.0055969 -1.6434 0.1007
2004 3Yr.Annlzd. 05-07 -0.0012282 -0.8915 0.3729
2005 2006 0.00267001 1.3400 0.1806
2005 2007 -0.0097666 -2.8907 0.0039
2005 2008 0.00199272 0.8611 0.3894
2005 3Yr.Annlzd. 06-08 -0.0009475 -0.7290 0.4662
2006 2007 0.00396874 1.1562 0.2480
2006 2008 -0.0045077 -1.9294 0.0540
2006 2009 -0.0060605 -1.5259 0.1274
2006 3Yr.Annlzd. 07-09 -0.0027068 -2.0869 0.0372
2007 2008 -0.0078878 -3.1781 0.0015
2007 2009 0.00808239 1.9095 0.0566
2007 2010 0.0031355 1.1746 0.2405
2007 3Yr.Annlzd. 08-10 -0.001253 -0.8319 0.4057
2008 2009 -0.0101607 -2.5091 0.0123
2008 2010 -0.0023164 -0.9052 0.3656
2008 2011 -0.0042827 -2.2984 0.0218
2008 3Yr.Annlzd. 09-11 -0.005058 -3.2556 0.0012
2009 2010 -0.0022105 -0.8283 0.4077
2009 2011 0.0017611 0.9039 0.3663
2009 2012 -0.0014224 -0.9447 0.3451
2009 3Yr.Annlzd. 10-12 -0.0004352 -0.4000 0.6893
Overall Ratingt Returnt+1 0.0019326 0.6438 0.5197
Overall Ratingt Returnt+2 0.0018936 0.6278 0.5301
Overall Ratingt Returnt+3 -0.0035034 -1.1511 0.2497
Overall Ratingt Returnann. 0.0009962 0.7742 0.4388
Exhibit 3
Regression
Results
Past performance does not guarantee future results.
Data Source: Morningstar Direct. Overall Ratings for mutual funds were regressed against their annual return one, two and
three years after the Overall Rating was issued as well as the annualized return for the three years following the year the
Overall Rating was issued. For all time periods, the Overall Rating at time t was regressed against annual return at t+1, t+2,
and t+3 years after the Overall Rating was issued as well as the annualized return for the three years following the year the
Overall Rating was issued.
6. 5 | Overcoming the Morningstar Heuristic
DespitetheevidencepresentedaboveandincreasedattentiontothelackofpredictivepowerofMorningstar’s
star rating7
, why does the rating continue to have such influence over investor decisions? Even Don
Phillips acknowledged at a conference in 2010 that, “the star rating is a grade on past performance. It’s an
achievement test, not an aptitude test…We never claim that they predict the future.8
” The undue influence
the rating has on investor decision-making may be explained by psychological biases resulting from the
tendency of people to use common sense, educated guesses or shortcuts (i.e. heuristics) to make decisions
in the face of uncertain outcomes. Kahneman9
and Tversky (1973) note that, “in making predictions and
judgments under uncertainty, people… rely on a limited number of heuristics which yield reasonable
judgment and sometimes lead to severe and systemic errors.10
” Making investment decisions is difficult,
and this is especially true if an investor has limited investing experience or expertise. Due to the uncertain
nature of future investment decision outcomes, investors seek out heuristics to guide them when making
these decisions. This is where the Morningstar star rating comes in. Although Phillips acknowledged the
rating’s focus on past performance, three weeks prior to that acknowledgment the Wall Street Journal
reported that [Don] Phillips “believes [the star ratings] are as good a shortcut as people have when it comes
to picking funds.11
” The evidence presented above, however, demonstrates that the ratings do not show a
consistent ability to predict or forecast funds’ future performance, and relying on the star rating may lead to
poor investment decisions.
That the Morningstar star rating acts as a heuristic doesn’t fully explain the rating’s popularity with
investors when making decisions. The key to understanding the rating’s popularity may be found with
the biases which can be formed when using a heuristic. Kahneman and Tversky (1974) demonstrate that
“anchoring” may lead individuals to make poor estimates and affect their decision-making. “Anchoring”
occurs when people allow an initial value to bias their estimates of other values, with estimates adjusted
from the initial value. Kahneman andTversky demonstrate this effect by asking subjects to estimate various
values, such as the number of African countries represented in the United Nations, after spinning a wheel
of fortune numbered 0-100. Kahneman and Tversky found that the arbitrary numbers obtained from
spinning the wheel of fortune influenced the subjects’ guesses of the values they were asked to estimate.
The Morningstar star rating may serve the same purpose as the wheel of fortune; it acts as a statistically
insignificant anchor which can bias investment decisions. Unfortunately, this phenomenon may make
it difficult to recommend funds that do not carry a high Morningstar star rating if investors allow the
anchoring bias to affect their investment decisions.
Morningstar exacerbates the anchoring bias through the placement of the Morningstar star rating on
its reports and through the use of heavy advertising12
. A review of reports distributed by Morningstar
demonstrate their use of the star rating. The Investment Detail and QuickTake reports provide the star
7. 6 | Overcoming the Morningstar Heuristic
rating just to the right of the name of the fund. Reading left to right, the star rating is the second piece
of information received about the fund, after its name. In the Fund vs. Fund and Investment Summary
reports, the Morningstar star rating is placed in the upper third of the page, near the other performance
metrics. Morningstar even has an entire report focused on a fund’s Morningstar star rating history. The
placement and use of these ratings make it easy for investors to use the rating as a heuristic to make
investment decisions and to formulate an anchoring bias.
Investing is complex and uncertain. This can cause investors to seek out intuitive ways of making sense
of investment decisions but can lead them toward making poor investment choices. While it is intuitive
to think that a higher-rated fund would perform better than a lower-rated fund in the future, the
evidence presented doesn’t support that. Past performance is not indicative of future performance and the
Morningstar overall rating illustrates this well. Picking funds on the basis of the star rating is akin to picking
lottery numbers based on last week’s drawing. The use of the Morningstar star rating as a heuristic can be
especially problematic due to its prevalence and positioning in many of Morningstar’s reports. The rating
is oftentimes one of the first pieces of information received about a fund which allows investors to use the
rating as a heuristic and to formulate a Morningstar star rating anchoring bias which can adversely affect
their investment decisions. By understanding that the star rating may serve as an anchor for investors, and
bias their decision-making, we may be able to improve investment decisions.
8. 1
Compiled from Morningstar data
2
Diane Del Guercio and Paula A.Tkac, Star Power:The Effect of Morningstar Ratings on Mutual Fund Flows,
Working paper 2001-05,August 2001.
3
Morningstar RatingTM
Methodology Paper, June 30, 2009
4
Morningstar RatingTM
Methodology Paper, June 30, 2009
5
The Associated Press, Morningstar’s Analyst Ratings, at a Glance, June, 21, 2012.
6
Robert D. Hershey, Jr. Fund Ratings that Take Aim at the Future, January 7, 2012.
7
Don Philips, Star Wars, the Sequel (Morningstar Advisor), 08-12-10; Sam Mamudi, Investors Caught with Stars in
their Eyes (Wall Street Journal), 06-01-10; Michael Maiello, Ignore Morningstar’s Stars, (Forbes), 1-30-09.
8
https://www.investmentplan.com/morningstar-star-ratings/; http://www.thinkadvisor.com/2010/08/01/
morningstar-investment-conference-highlights?ref=desktoplink
9
Daniel Kahneman won the 2002 Nobel Memorial Prize in Economic Sciences for his study of economic
decision making and judgment.
10
Daniel Kahneman and AmosTversky, OnThe Psychology of Prediction, July 1973, Psychological Review.
11
Sam Mamudi, Investors Caught with Stars in their Eyes (Wall Street Journal), 06-01-10
12
Michael Maiello, Ignore Morningstar’s Stars, (Forbes), 1-30-09.
Reviewed by Larry R Frank Sr., Better Financial Education, Registered Investment Adviser (California)
LWI Financial Inc. (“Loring Ward”) is an investment adviser registered with the Securities and Exchange Commission.
Securities transactions are offered through its affiliate, Loring Ward Securities Inc., member FINRA/SIPC. IRN R 13-276 (Exp 8/15)