Something made me think of this today. I was on board those many years ago when it was the hottest thing going, the manager the focus of much adulation. Seem to recall I exited with a gain, but one much reduced from the top. Its fall from grace is old news. Hard to believe the following though:
--The fund still has over $1 billion AUM.
--Over one-third of those assets belong to the manager.
--80+% of the fund is invested in a single security.
--The fund charges 1% per annum for the privilege of ownership. (To a large extent the manager is paying himself.)
--Over the past 10 and 15 years the fund's returns land in the bottom 1% of its category (according to you-know-who).
--You-know-who accords the fund its Silver medal. (Huh?!)
Investing is such a personal endeavor it's difficult to understand what some people are thinking.
Comments
(I say this as a former long-term holder of FAIRX; who bailed after a couple of years of watching Bruce do a lot of weird stuff)
I know what gives it a silver medal - the medal is 0% analyst driven.
There's no depth in the computer-generated "analysis". It looks at the five year return, which is well above average, without discounting this performance due to the fund's one-security concentration and essentially zero turnover. The software acts like a simple pattern matching program that could have been written a quarter century ago or more.
And it (not who) praises manager retention, without taking into account the possibility of the fund being a typical outlier - single manager, concentrated, lousy fund retaining its manager "forever". Who, or at least who of a certain age, could forget Heiko Thieme of American Heritage and American Heritage Growth?
https://www.marketwatch.com/story/mutual-fund-morgue-had-less-work-in-2008-than-it-should-have?mod=article_inline
Interesting that we are talking about Wood and Berkowitz with similar threads.
I find the chart below fascinating!
FAIRX Flows and Return Data Since Inception (Absolute Scale)
Over its long life, it's actually beaten the SP500 handedly and has been almost as good as Buffett. Bruce's misstep and perhaps Morningstar's was the expectation set in its first decade. The life of a fund is only as long as its investors believe in the manager.
Return Comparison Since FAIRX Inception
https://reuters.com/article/us-usa-fannie-freddie-idUSBRE94S19F20130529/
Seemed almost criminal the way the government reneged on their payment obligations on those bonds and BB (FAIRX) sued US Government as I recall.
Tens years later shareholders (maybe FAIRX)?) win in court:
significant-trial-victory-in-helping-fannie-mae-and-freddie-mac-shareholders-recoup-612-million-in-class-action
That was Eddie Lampert - his bright idea was to buy Sears and Kmart just for the real estate, run them down, and make tons of money on real estate. Problem was when the anchor stores failed, big malls failed, the real estate values collapsed, and Eddie Lampert got burned.
Now some malls are being developed as mixed use office-residences-shopping-entertainment.
Bruce Berkowitz also had Sears stock for a while, and served on Sears Board. But in the end, it was all Eddie Lampert.
1) What happened to Sears Holdings?
It was the 20th-largest retailing company in the United States in 2015. It filed for Chapter 11 bankruptcy on October 15, 2018, and sold its assets to ESL Investments in 2019. The new owner moved Sears assets to its newly formed subsidiary Transformco and after that, Sears Holdings Corporation was closed.
2) What caused the downfall of Sears?
The Downfall of Sears: A Failure to Embrace Digital ...
Sears' inability to execute on delivering these omnichannel experiences is just one of the many ways this former retail hero let down its once-booming customer base. Sears ultimately failed because of its reluctance to fully believe in the consequences of a rapidly changing retail landscape.
I don't care how good any manager is, when their funds don't work, and I don't care why, I switch.
@Shoatakovich. Yep. That excludes a lot of funds. But having a big team doesn't always help either ... D&C, Grandeur, BG, MS Counterpoint, Primecap? They've all had their time in the barrel. But, I agree that if you are looking for funds for a lifetime, they need to have staying power ... the enterprise needs to be substantial. I never got the feeling Buffett had a big staff, but his enterprise is certainly substantial.
@Shoatakovich. Yep. That excludes a lot of funds. But having a big team doesn't always help either ... D&C, Grandeur, BG, MS Counterpoint, Primecap? They've all had their time in the barrel. But, I agree that if you are looking for funds for a lifetime, they need to have staying power ... the enterprise needs to be substantial. I never got the feeling Buffett had a big staff, but his enterprise is certainly substantial
I believe you meant to say "doesn't.
Just guessing, Derf
The fund firm matters a lot. For example, Fido managers have great institutional support whether a fund has star manager (FCNTX, FDGRX) or a crowd (FBALX - a graveyard of former Fido managers that Fido wants to keep). Manager transitions matter less at Fido, Pimco, Price, Vanguard, etc - despite the mistakes they may have made.
This is why some managers don't succeed when they move away from their original firm. Even the so-called bond-guru Bill Gross couldn't do it after he was out at Pimco (his fund at JHG was a disaster).
Some firms such as American Funds/Capital Group have a policy of multiple managers to avoid the star-manager problem.
Investors should be wary of fund boutiques (BRUFX, etc) with 1-2-3 funds. There are several posts at MFO about such concentrated/focused, hot-hand funds (old or new). Mutual funds rely on the separation of fund administration, management and distribution for "safety", but those functions may overlap a lot at boutique funds - and this required separation may be barely legal at boutique firms.
Bruce Berkowitz (FAIRX) has mostly his and family's money in the fund. He also gets to run JOE, and his interests are NOT aligned with the other public holders of FAIRX. In a way, he is using other-people's-money (OPM) for his own interests. So, while some fund ownership by managers is desirable, too much of it may be BAD.
On the other hand, I don't think much of Royce as an organization even though they have a pretty sizeable research team. Oakmark has lagged in a lot of areas (but I don't think they're not above board; Bruce B was just going nuts at the end).
Yogi’s last post has two important concepts that do not get enough attention in the way he put them: fund firm vs manager star power and amount invested by manager in the fund.
A few years ago we asked the same question if it is headed in the wrong direction and our answer was what you said. From my vantage, M* had gotten worse since then.
I have not delved into the space in which M* operates. Does M* have a wide moat? Why do its shareholders think M* revenue and profits are secure?
P.s.: I know of a company which is by far the worse American company I deal with but it consistently trades at nosebleed valuations. I even thought of shorting it, which I normally do not. Then it occurred to me that its customers are captive and it has a business model to capture new customers too - a true hotel CA.
I extracted the paragraphs below from our 2021 MICUS report. A bit dated, but I believe M* has continued to grow its business even higher in the 3 years since.
The Business
If attendance at Morningstar The Conference was down this year, it does not reflect the success of Morningstar The Business, in spite of COVID or perhaps helped by it. Since Kapoor took over CEO in 2017, employees have doubled, as have MORN’s valuations. The company’s market cap has nearly quadrupled.
Adding to its acquisition of private equity tracker Pitchbook, the company acquired credit rating firm DBRS in 2019 and ESG rating firm Sustainalytics in 2020.
Since most people probably think of Morningstar as just the “Good Housekeeping” of the fund industry, it’s probably worth listing all their current products:
• DBRS Morningstar – Independent rating services and …
• Morningstar Advisor Workstation – Investment research, financial planning, client reporting …
• Morningstar Data – Global equity, managed investments, and market data …
• Morningstar Direct – Advanced portfolio analytics and performance reporting …
• PitchBook – Data, analysis, industry news, and in-depth reports on the private and public markets …
• ESG Investing Solutions – Assessments of ESG risks and opportunities across asset classes …
• Financial Planning Solutions – Web-based financial planning tools for advisors
• Sustainalytics – Sustainable investment strategies and security-level ESG research and ratings …
• Morningstar Office – Web-based portfolio and practice management …
• Morningstar Research – Independent, comprehensive evaluations on equities, funds …
• Morningstar Annuity Intelligence – Annuity research for professional investors
• Morningstar ByAllAccounts – Account-aggregation and financial-management tools…
• Morningstar Commodities & Energy – Research and data in the commodities and energy sectors …
• Morningstar Credit Information and Analytics – Credit tools and research …
• Morningstar Enterprise Components – Configurable, ready-to-integrate enterprise software …
• Morningstar Essentials – Investment statistics and ratings for institutional marketing professionals
• Goal Bridge – Goal-setting and investment planning for financial advisors
• Morningstar Investment Research Center – Comprehensive investment resources for library patrons
• Morningstar Reporting Solutions – Marketing materials, regulatory documents, and other custom …
• Manager Selection Services – Manager selection and investment analysis for financial advisors
• Morningstar Total Rebalance Expert – Tax-aware rebalancing for financial advisors
• Morningstar Indexes – Product benchmarking & creation for financial institutions and asset managers
• Managed Portfolios – Mutual fund, stock, and exchange-traded fund portfolios …
• Morningstar Retirement Manager – Workplace retirement account service for plan sponsors
• Advisor Managed Accounts – Managed accounts for registered investment advisors
• Morningstar Fiduciary Services – Investment selection, portfolio monitoring, and portfolio reporting …
• Morningstar Plan Advantage – Comprehensive retirement-plan management …
• Target-Date Solutions – Target-date funds for plan sponsors
• Morningstar Premium – Analysis of stocks, funds, and markets, plus tools …
• Morningstar Investor Newsletters – Investment strategies and in-depth analysis …
Morningstar’s founder and chairman, Joe Mansueto, retains about 45% of outstanding shares, representing a current value of about $5 billion. If there is someone vested in Chicago’s recovery, it would be him. He purchased the historic Wrigley Building in 2018 and most recently the Waldorf Astoria Chicago. He owns Major League Soccer’s Chicago Fire. He remains a large donor to the University of Chicago, his alma mater.
One of the businesses Morningstar entered just under three years ago was their own brand of mutual funds, which replaced other funds in its Managed Portfolios business. The nine funds have accumulated $5.3B in AUM, or about $44M in additional fees for Morningstar.
At the time, it seemed awkward to us [here’s David’s Take] and it remains awkward for Morningstar to offer its own competing funds. What’s worse is that so far they have performed unremarkably, as can be seen in the table below. As a fiduciary, I would be hard-pressed to defend why these funds were chosen over others recommended by Morningstar’s own research teams. None of the funds will qualify for Morningstar’s “5 Star” rating when they soon reach the 3-year mark. Morningstar is also a sub-advisor of five other funds for ALPS. These five ETF asset-allocation portfolios suffer even worse performance; in fact, Morningstar itself ranks the ALPS family “Below Average.”
In the meantime, M* has done everything possible to turnoff or upset its retail investors - remember, those were the guinea pigs that debugged lot of M* software and helped M* with feature requests (M* software was free then and M* was also quite responsive). Now lot of those are very expensive M* professional products. M* now thinks that it can afford to lose a couple of hundred retail clients to gain one professional client.
But further progress to become a real "Bloomberg" may not be easy. If not careful, like Icarus, it may fly too close to the sun.
To pick some items from the list:
"DBRS Morningstar – Independent rating services and …"
OK, but it hasn't become one of the nationally recognized credit agencies (NRSROs). Problem - its credit rating methodologies are opaque, mostly computer-driven, and it won't disclose companies handled per employee.
https://www.sec.gov/about/divisions-offices/office-credit-ratings/current-nrsros
"Sustainalytics – Sustainable investment strategies and security-level ESG research and ratings …"
Well, that was a hugely mistimed ESG capex that misfired. M* can put all of the ESG stuff on its fund pages, but the tide in the US has turned away from ESG. In Europe, ESG is still selling.
"Advisor Managed Accounts – Managed accounts for registered investment advisors"
Recent dumping M* TAMP will hurt the RIA business.
https://riabiz.com/a/2024/6/24/morningstars-sale-of-tamps-12-billion-book-of-business-to-assetmark-ends-two-year-run-that-fell-short-on-growth-whether-rias-stick-or-flee-will-determine-fate-of-deal
I am not negative on M*, but I count myself among the concerned. An irony is that not long ago, I used to link to live M* Charts, but now link to live charts from PV (also very limited now) or StockCharts or TestFol (a free newcomer).
TestFol MORN Max
That is a big list of services. In which of those services are they #1, 2, or 3 in the market place.
For example, their fund analysis used to be so informative but now the same product is harmful, like the prescription drugs hawked at the street corner. May be they are #1 in that service too if no one else offers the same service but why bother have a service that is harmful, even if you are the only one providing. May be diminishing their brand in the eyes of their retail customers is less costly than the potential Ad revenue. For the retail clients, M* are a distant shadow of their own past.
Is the same Fund Analysis not offered to their institutional / professional clients?