Morningstar Ratings and Future Fund Performance

In a recent paper published by the firm’s quantitative research team, the Morningstar Rating, also known as the “star rating”, is summarized and evaluated with respect to accuracy. Morningstar now publishes star ratings on more than 217,000 managed investments across 72 countries. The rating system was introduced in 1985 to help investors and advisors better understand and assess the “crowded mutual fund landscape.” It evaluates the performance of a variety of funds (on a risk-adjusted basis and accounting for fees charged) for the period between January 2003 and December 2015 and assigns a rating of between 1 and 5 (lowest […]

Returns Look Low Going Forward

“In an industry dominated by promises of higher return investors need to ask higher than what?” This question is posed in a recent Barron’s article (provided by Research Affiliates) which argues that many investors face less than 5% annualized returns on their retirement nest eggs over the next decade. The following portfolio types are discussed: Classic 60/40: This blend of U.S. stocks and bonds has been, according to the article, “perhaps the most comfortable to own,” and has performed well over the years. “But from today’s vantage point, with U.S. bonds exceptionally low and equity P/E ratios in the top […]

Bryon Wien’s Sobering Thoughts on World Markets

“The ‘Leave’ outcome is a setback for growth in Britain, Europe and around the world at a time when economies are generally struggling. Not a good sign for markets for the rest of the year,” writes Blackstone strategist Byron Wien in a recent article for Barron’s. Wien references the opinion of Bard economic historian Walter Russell Mead, who believes that Brexit and nationalism are generally born of a “systemic crisis” related to: Economic vulnerability of the Eurozone; Middle East refugee crisis and fear of terrorism; Russian aggression. Wien visited Europe last month to meet with investors and discuss market uncertainty. […]

There’s a Hole in the CAPE Ratio

When predicting future real returns of stock markets, the cyclically adjusted price/earnings ratio (CAPE) is a good place to start. The formula, first proposed by guru Benjamin Graham, is pretty simple: the current price of a stock market (or single stock) divided by the average earnings of the last 10 years (both adjusted for inflation). An article in this month’s “Enterprising Investor” speaks to how this calculation has recently come under scrutiny. Wharton professor Jeremy Siegel contends that accounting changes effected in the early 1990’s have resulted in artificially low earnings numbers and, subsequently, artificially high CAPE ratios. This has […]

To Bolster Returns Large Investors Will Have to Come Up the Risk Curve

Gone are the days when a conservative bond portfolio will provide a decent return. Low interest rates and a sluggish economy are forcing investors to accept higher risk to get the same returns they would have twenty years ago (by buying and holding investment-grade bonds). The Wall Street Journal recently reported that research conducted by Callan Associates, Inc. (which advises large investors)  shows that in order to make a 7.5% return today, a portfolio’s bond component would have to shrink to roughly 12% and private equity and stocks would have to account for nearly three-quarters of the investment pool. Jay […]