FYI:
Regards,
Ted
October 26, 2017
Dear WEALTHTRACK Subscriber,
Do Morningstar’s “Star” ratings matter? There was an excellent analysis of them in today’s The Wall Street Journal which concluded that they have scant predictive value of future performance. Since I have been a long time user and fan of Morningstar, I have to weigh in. Morningstar has done investors a tremendous service by analyzing and tracking thousands of individual mutual funds and their various classes, over the years. It is about much more than performance. It researches strategies, styles, culture, individual managers, expenses and yes, performance versus the market and competitors. It does risk/adjusted analysis as well. It now also measures investor experience in each fund to see if investors benefit from the fund’s performance as well, or if they sabotage themselves by chasing performance, or bailing out during a bad spell.
No ratings system is perfect. The star ratings and now the analysts’ “best of breed ratings” of gold, silver or bronze medals provide a headline, a current reading about a fund. They are well researched screens done for the benefit of investors, not the funds or Morningstar itself. The research behind the star or medalist rating is much more important. I will continue to use Morningstar as one important source, but not the only one, for reference, research and yes, guidance on mutual funds.
Professional investors are always looking for an edge - a strategy that will enable them to beat the market. It turns out there has been one hiding in plain sight. It’s called factor investing. It combines fundamental analysis, active management and passive investing and it’s gaining in popularity.
The concept of factor investing has been around since the 1960’s when research showed that certain factors, those are certain characteristics of stocks, had a positive impact on their performance. Five of the most popular factors that have added alpha, or returns in excess of the market, to groups of stocks over the years will all sound familiar. They are:
Size - Small company stocks which tend to grow faster than larger ones outperform the market over time.
Value - Less expensive stocks should do better than more expensive ones. Thank Ben Graham, the father of value investing, for identifying this really early on.
Momentum - This is a more controversial one. Stocks whose prices are going up for several months tend to do better than stocks whose prices are flat or declining.
Quality - High quality stocks with strong profitability for instance, generate excess returns.
Low volatility - Stocks that have lower risk, or price volatility than the market have a history of outperforming the broader market.
As they say on Wall Street: “Past performance is no guarantee of future results” but these five factors have outperformed the market over the years, although there were multi-year periods when each did not.
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This week’s WEALTHTRACK guest is an acknowledged expert on factor investing. He was an early adaptor, as was his firm. We’ll be joined by Matthew Peron, Head of Global Equity at Northern Trust Asset Management, where he manages the firm’s multi-strategy approach using passive index funds, fundamental active management and his own brand of factor investing which it has trademarked as “Engineered Equity”. With more than 20 years of experience with factor investing, the firm is one of the top ten factor investors in the world by assets.
Northern Trust runs several factor-based portfolios including two 4-star rated mutual funds, Large Cap Core and Small Cap Value, as well as two 5-star rated ETFs, using a combination of factors, FlexShares Quality Dividend and FlexShares Quality Dividend Defensive. On this week’s program, I asked Peron to explain factor investing and how he decides which investment approach to use at any given time.
If you miss the show on television you can always watch it on our website at your convenience. We also have an EXTRA interview with Peron about the market impact of the enormous amount of money going into passive investments. It will be available exclusively on our website.
If you would like to take WEALTHTRACK with you on your commute or travels, you can now find the WEALTHTRACK podcast on TuneIn, Stitcher, and SoundCloud, as well as iTunes. Find out more on the WEALTHTRACK Podcast page.
Have a great weekend, a fun Halloween, if you are participating in tricks or treats, and make the week ahead a profitable and a productive one.
Best Regards,
Consuelo
Video Clip:
utm_term=0_bf662fd9c0-3bc0618095-71656893
M* Northern Trust Family Of Funds:
http://quicktake.morningstar.com/fundfamily/northern-funds/0C00001J8I/fund-list.aspxFlexShares Family Of ETFs:
https://www.flexshares.com/exchange-traded-funds 
