Study Finds that Simple is Better in Mutual Fund Management

A recent study conducted by researchers at Queen’s University in Ontario shows that, on average, domestic stock mutual funds that use hedge fund strategies such as leverage, options and/or shorting underperformed their peers, writes John Rekenthaler in a recent Morningstar article. Using 17 years’ worth of U.S. mutual fund return data, the study delved into why this occurred. “As you may suspect,” writes Rekenthaler, “some of the shortfall owes to extra costs.” However, he says, that’s not the only issue. While the article emphasizes the “dangers” of mutual fund research that “consumes massive amounts of data, and returns summary statistics,” […]

Rekenthaler Report: It’s Hard to Be Like Buffett

While every fund manager yearns for Buffett results, “most don’t mimic his investment approach” writes Morningstar’s John Rekenthaler in his September report. Concentrated, low-turnover portfolios are “not for everybody,” he says, and even when managers try to follow in the Oracle’s footsteps the results are often “dismal”. Rekenthaler says there are two dozen U.S. stock mutual funds that could be called Berkshire hopefuls based on their large-value or large-blend investment styles, fewer than 25 stock positions and annual turnover of less than 50%. But their collective results, he says, “stink,” citing three year returns of 7.74% to Berkshire’s 10.61%. To […]

Every Crisis is Different

It would be great if we could extract lessons from every financial crisis and then apply those lessons to avert future crises. Alas, writes Morningstar columnist John Rekenthaler, “The market’s turning points are never evident until after they have occurred.” That’s not to say, however, that some don’t read the writing on the wall and act accordingly. Rekenthaler writes, “Investors of various backgrounds figured out the housing bubble before it popped. Many more anticipated the 2000-2002 tech bust, as hundreds of hedge funds dodged that downturn altogether.” However, he argues, almost none of them were able to repeat their successes. […]

Rekenthaler: 3 Options for Outperformance

John Rekenthaler of Morningstar asks “what are the possible paths to outperformance?” and comes up with three options. Find the “market’s dummies”: First, he says, there is the “traditional approach” in which “there seems to be plenty of opportunity for the gifted minority to relieve the dumb of the burden of wealth.” But, Rekenthaler maintains, “it hasn’t worked that way.” Instead, “most of the stock market’s would-be wolves have instead been deceived sheep – dumb money that has fooled itself into thinking that it is smart.” While acknowledging that professional managers tend to be paid regardless and that there are […]

The Trouble with Mean Reversion

Mean reversion is a key part of many investors’ strategies, and right now some are pointing to above-the-mean cyclically-adjusted price/earnings ratios as a sign that stocks are overvalued. But Morningstar Vice President of Research John Rekenthaler says mean reversion isn’t as simple as it may seem. If you take the current long-term mean and see where stocks were in relation to that mean in, say, 1992, it might look like it was an easy choice to buy or sell stocks back then, Rekenthaler notes. “It looks crystal clear going backwards,” he says. “[But it doesn’t seem to work so well in 1992, when […]