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Up Market Or Down, These Funds Have Beaten Their Benchmarks
In general, I'm very satisfied with Morningstar's database and its presentations. I do not wish to pile-on, but their operation does slip on occasion.
Their upside and downside capture ratios are one such occasion. The concept is excellent: the execution is terrible.
Although Morningstar has a huge number of fund categories, they elect to rank all funds against just 3 benchmarks: the S&P 500, the MSCI EAFE Index, and theBarclays Aggregate Bond Index. That's just plain lazy. The Capture Ratios are only solid signals of performance when contrasted against a meaningful benchmark measure.
Is it fair to measure the performance of a small cap value fund against the S&P 500? Is it an honest assessment to judge a short term corporate bond fund against the Barclay benchmark? The answer to both questions is a definite No.
I'm not sure I understand why Morningstar gets into these easily avoidable pitfalls.
MJG, your main point is excellent. As a side note, it doesn't look like they are using the MSCI EAFE Index. From the article, "For international-stock funds it's the MSCI ACWI Ex USA Index"
MJG you are so right. They even use ACWI index for emerging market funds, which is not only lazy, but just dumb, even though they list the best-fit index as EAFE EM. And often times the best-fit index is a head scratcher, too. But it is much better than using the 'primary benchmark' to do the calculation.
We always find out from the fund managers what benchmark they use in-house. It is often found in the fund prospectus, but it is an easy question to ask during a call. Then we use THAT benchmark in our evaluations of the fund. Unfortunately it is not something you can use in M*. You have to plug it into a separate spreadsheet, but it is worth the effort. Otherwise you can get a result that is way too rosy or much worse than it should be, not to mention they are often simply meaningless. Using the ACWI to do up/down ratios for Latin America funds? Come on!
Comments
In general, I'm very satisfied with Morningstar's database and its presentations. I do not wish to pile-on, but their operation does slip on occasion.
Their upside and downside capture ratios are one such occasion. The concept is excellent: the execution is terrible.
Although Morningstar has a huge number of fund categories, they elect to rank all funds against just 3 benchmarks: the S&P 500, the MSCI EAFE Index, and theBarclays Aggregate Bond Index. That's just plain lazy. The Capture Ratios are only solid signals of performance when contrasted against a meaningful benchmark measure.
Is it fair to measure the performance of a small cap value fund against the S&P 500? Is it an honest assessment to judge a short term corporate bond fund against the Barclay benchmark? The answer to both questions is a definite No.
I'm not sure I understand why Morningstar gets into these easily avoidable pitfalls.
Best Regards.
From the article, "For international-stock funds it's the MSCI ACWI Ex USA Index"
We always find out from the fund managers what benchmark they use in-house. It is often found in the fund prospectus, but it is an easy question to ask during a call. Then we use THAT benchmark in our evaluations of the fund. Unfortunately it is not something you can use in M*. You have to plug it into a separate spreadsheet, but it is worth the effort. Otherwise you can get a result that is way too rosy or much worse than it should be, not to mention they are often simply meaningless. Using the ACWI to do up/down ratios for Latin America funds? Come on!