Morningstar responds to Wall Street Journal article
- Taylor Larimore
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Morningstar responds to Wall Street Journal article
Bogleheads:
Today's Wall Street Journal features 2+ pages examining and denigrating Morningstar's STAR and Analyst ratings.
Morningstar is now featuring several replies. This is one of them:
http://www.morningstar.com/company/message-from-ceo
Lesson for investors: Statistics should be viewed with caution.
Best wishes.
Taylor
Today's Wall Street Journal features 2+ pages examining and denigrating Morningstar's STAR and Analyst ratings.
Morningstar is now featuring several replies. This is one of them:
http://www.morningstar.com/company/message-from-ceo
Lesson for investors: Statistics should be viewed with caution.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Morningstar responds to Wall Street Journal article
Thanks for the "heads up", Taylor
Re: Morningstar responds to Wall Street Journal article
Thank you for the information, Taylor. However, I'm unclear on your lesson. Is it a criticism of the WSJ analysis (this is a link to the article), the Morningstar's rating system, or both?Taylor Larimore wrote: ↑Thu Oct 26, 2017 9:21 pm Lesson for investors: Statistics should be viewed with caution.
I think Morningstar deserves every bit of criticism it got from the WSJ. Morningstar knows its rating system is only weakly predictive of future performance, and they claim they don't intend for it to be used as anything more than a starting point in screening funds. Yet they also know that the vast majority of investors and advertisers misuse it, and they do virtually nothing to correct that problem, year after year. There is no excuse for that.
The best thing they could do is to eliminate the star rating system altogether and direct attention to fund expenses, which is a better way to screening funds. Their own study showed us that. Yes, Morningstar deserves tremendous credit for transparency on this. But they deserve severe criticism for not addressing the way the rating system continues to be misused (or, really, the problem that it is used at all). Unless they are willing to eliminate the star rating system altogether, they should at least make it less prominent, and pair it with an equally prominent disclaimer that clearly spells out how the ratings are backward-looking, that they are not intended to be predictive, and that they are not an effective means of predicting future fund performance.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
Re: Morningstar responds to Wall Street Journal article
Here is another article, this one by Don Phillips, defending the Morningstar rating system: The Wall Street Journal's Statistical Fog
It's interesting that nowhere in yesterday's article does Mr. Phillips acknowledge that investors would be more successful just by considering risk and costs. That seems to be his conclusion, when pressed, in an interview with Steve Forbes published on 2/20/2009: viewtopic.php?p=811029#p811029
(Sorry, the original link to the interview, which included a video and transcript, is no longer working, and the internet archive did not seem to capture even the transcript.)
It's interesting that nowhere in yesterday's article does Mr. Phillips acknowledge that investors would be more successful just by considering risk and costs. That seems to be his conclusion, when pressed, in an interview with Steve Forbes published on 2/20/2009: viewtopic.php?p=811029#p811029
(Sorry, the original link to the interview, which included a video and transcript, is no longer working, and the internet archive did not seem to capture even the transcript.)
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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Re: Morningstar responds to Wall Street Journal article
I absolutely agree with you.iceport wrote: ↑Fri Oct 27, 2017 5:21 amThank you for the information, Taylor. However, I'm unclear on your lesson. Is it a criticism of the WSJ analysis (this is a link to the article), the Morningstar's rating system, or both?Taylor Larimore wrote: ↑Thu Oct 26, 2017 9:21 pm Lesson for investors: Statistics should be viewed with caution.
I think Morningstar deserves every bit of criticism it got from the WSJ. Morningstar knows its rating system is only weakly predictive of future performance, and they claim they don't intend for it to be used as anything more than a starting point in screening funds. Yet they also know that the vast majority of investors and advertisers misuse it, and they do virtually nothing to correct that problem, year after year. There is no excuse for that.
The best thing they could do is to eliminate the star rating system altogether and direct attention to fund expenses, which is a better way to screening funds. Their own study showed us that. Yes, Morningstar deserves tremendous credit for transparency on this. But they deserve severe criticism for not addressing the way the rating system continues to be misused (or, really, the problem that it is used at all). Unless they are willing to eliminate the star rating system altogether, they should at least make it less prominent, and pair it with an equally prominent disclaimer that clearly spells out how the ratings are backward-looking, that they are not intended to be predictive, and that they are not an effective means of predicting future fund performance.
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Re: Morningstar responds to Wall Street Journal article
+1. The above is a consise and thoughtful analysis.iceport wrote: ↑Fri Oct 27, 2017 5:21 amThank you for the information, Taylor. However, I'm unclear on your lesson. Is it a criticism of the WSJ analysis (this is a link to the article), the Morningstar's rating system, or both?Taylor Larimore wrote: ↑Thu Oct 26, 2017 9:21 pm Lesson for investors: Statistics should be viewed with caution.
I think Morningstar deserves every bit of criticism it got from the WSJ. Morningstar knows its rating system is only weakly predictive of future performance, and they claim they don't intend for it to be used as anything more than a starting point in screening funds. Yet they also know that the vast majority of investors and advertisers misuse it, and they do virtually nothing to correct that problem, year after year. There is no excuse for that.
The best thing they could do is to eliminate the star rating system altogether and direct attention to fund expenses, which is a better way to screening funds. Their own study showed us that. Yes, Morningstar deserves tremendous credit for transparency on this. But they deserve severe criticism for not addressing the way the rating system continues to be misused (or, really, the problem that it is used at all). Unless they are willing to eliminate the star rating system altogether, they should at least make it less prominent, and pair it with an equally prominent disclaimer that clearly spells out how the ratings are backward-looking, that they are not intended to be predictive, and that they are not an effective means of predicting future fund performance.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Morningstar responds to Wall Street Journal article
So M* is launching their own mutual funds to compete with the funds their analysts rate. I couldn't imagine any conflicts emerging from that!
Personally, I find the comparison data and charts that M* provides very interesting.
Their ratings seem to be primarily a vehicle for fund companies to push funds with strong recent track records. I generally disregard.
Disclosure: I was pay walled from reading the wsj article
Personally, I find the comparison data and charts that M* provides very interesting.
Their ratings seem to be primarily a vehicle for fund companies to push funds with strong recent track records. I generally disregard.
Disclosure: I was pay walled from reading the wsj article
Re: Morningstar responds to Wall Street Journal article
Morningstar stars
wine spectator ratings
Meh --- marketing devices more than quality guides
wine spectator ratings
Meh --- marketing devices more than quality guides
Re: Morningstar responds to Wall Street Journal article
Another agreement with iceport.iceport wrote: ↑Fri Oct 27, 2017 5:21 amThank you for the information, Taylor. However, I'm unclear on your lesson. Is it a criticism of the WSJ analysis (this is a link to the article), the Morningstar's rating system, or both?Taylor Larimore wrote: ↑Thu Oct 26, 2017 9:21 pm Lesson for investors: Statistics should be viewed with caution.
I think Morningstar deserves every bit of criticism it got from the WSJ. Morningstar knows its rating system is only weakly predictive of future performance, and they claim they don't intend for it to be used as anything more than a starting point in screening funds. Yet they also know that the vast majority of investors and advertisers misuse it, and they do virtually nothing to correct that problem, year after year. There is no excuse for that.
The best thing they could do is to eliminate the star rating system altogether and direct attention to fund expenses, which is a better way to screening funds. Their own study showed us that. Yes, Morningstar deserves tremendous credit for transparency on this. But they deserve severe criticism for not addressing the way the rating system continues to be misused (or, really, the problem that it is used at all). Unless they are willing to eliminate the star rating system altogether, they should at least make it less prominent, and pair it with an equally prominent disclaimer that clearly spells out how the ratings are backward-looking, that they are not intended to be predictive, and that they are not an effective means of predicting future fund performance.
Help investors by looking a risk and cost - including not only the expense ratio but also turnover rate as this is a hidden expense that can really put a drag on performance.
- nisiprius
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Re: Morningstar responds to Wall Street Journal article
The star ratings do take risk into account, and try to compare apples with apples. That's good. They don't explicitly take expenses into account, but assuming that high expenses are as predictive as Morningstar has said, and as Bogleheads believe, expenses would also affect performance and thus be indirectly taken ito account in the star ratings.
The Morningstar analyst ratings--the "medals," gold, silver, bronze and the two bad ones whose names I forget--expicitly consider expenses as part of their methodology. Unfortunately (?) it appears that recently, maybe this year, they stopped showing the analyst ratings to site visitors who are not paid members.
I agree that there is a disconnect between what Morningstar actually says about the star ratings and the way they are used. It's a perfect example of lying without saying anything false. A fund company simply brags about "our four- and five-star funds" without saying anything in particular about the ratings, and virtually all naive investors, e.g. 401(k) plan participants, are going to assume they are predictive of future performance without anybody needing to say so.
The Morningstar analyst ratings--the "medals," gold, silver, bronze and the two bad ones whose names I forget--expicitly consider expenses as part of their methodology. Unfortunately (?) it appears that recently, maybe this year, they stopped showing the analyst ratings to site visitors who are not paid members.
I agree that there is a disconnect between what Morningstar actually says about the star ratings and the way they are used. It's a perfect example of lying without saying anything false. A fund company simply brags about "our four- and five-star funds" without saying anything in particular about the ratings, and virtually all naive investors, e.g. 401(k) plan participants, are going to assume they are predictive of future performance without anybody needing to say so.
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- Taylor Larimore
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"There are lies, damned lies and statistics"
Taylor Larimore wrote: ↑Thu Oct 26, 2017 9:21 pm Lesson for investors: Statistics should be viewed with caution.
iceport:iceport wrote:Thank you for the information, Taylor. However, I'm unclear on your lesson. Is it a criticism of the WSJ analysis (this is a link to the article), the Morningstar's rating system, or both?
My "Lesson for investors" is not a criticism of either the Wall Street Journal or Morningstar. I simply tried to point out that the Wall Street Journal article and the Morningstar articles, both based on statistics, arrived at different conclusions. Mark Twain said it better than did:
Best wishes.There are lies, damned lies and statistics.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: "There are lies, damned lies and statistics"
Thanks for the clarification. I see now that we agree.Taylor Larimore wrote: ↑Fri Oct 27, 2017 9:24 am My "Lesson for investors" is not a criticism of either the Wall Street Journal or Morningstar. I simply tried to point out that the Wall Street Journal article and the Morningstar articles, both based on statistics, arrived at different conclusions. Mark Twain said it better than did:Best wishes.There are lies, damned lies and statistics.
Taylor
Yes, and similarly, Morningstar is lying without saying anything false just by continuing to prominently display their ratings, and then buried in some article or study that a tiny percentage of their consumers will ever know about, let alone read, advising people to give those proud ratings very little weight. It's actually unconscionable, when you think about it.nisiprius wrote: ↑Fri Oct 27, 2017 8:47 am I agree that there is a disconnect between what Morningstar actually says about the star ratings and the way they are used. It's a perfect example of lying without saying anything false. A fund company simply brags about "our four- and five-star funds" without saying anything in particular about the ratings, and virtually all naive investors, e.g. 401(k) plan participants, are going to assume they are predictive of future performance without anybody needing to say so.
I am deeply appreciative of the immense service Morningstar has provided and continues to provide to small investors. It's just a shame that they have quite possibly caused as much harm as value over the years, steering casual readers, retirement plan participants, and retirement plan administrators(!) to the latest hot funds. One can only assume their business model depends upon continuing to mislead people.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
Re: Morningstar responds to Wall Street Journal article
This was featured on Nightly Business Report too, the Wall Street Journal reporter was interviewed. I forget what night that ran.
I subscribe to Morningstar and use it for research and to analyze my portfolios. It has been a great tool and I get access to their stock research. As with all tools, Morningstar is imperfect. I used to look over the ValueLine reports at my public library, the Morningstar website is a great place to research and I can do the research in my jammies.
Bogleheads know to not just pick funds on star ratings, we know about reversion to the mean and we know about survivorship bias. The Wall Street reporter said that over time, the 5 star funds morph into 3 star funds over time. The ratings are useful in that we know that bad funds tend to stay bad.
The really, really bad funds just disappear.
I subscribe to Morningstar and use it for research and to analyze my portfolios. It has been a great tool and I get access to their stock research. As with all tools, Morningstar is imperfect. I used to look over the ValueLine reports at my public library, the Morningstar website is a great place to research and I can do the research in my jammies.
Bogleheads know to not just pick funds on star ratings, we know about reversion to the mean and we know about survivorship bias. The Wall Street reporter said that over time, the 5 star funds morph into 3 star funds over time. The ratings are useful in that we know that bad funds tend to stay bad.
The really, really bad funds just disappear.
A fool and his money are good for business.
Re: Morningstar responds to Wall Street Journal article
It appears to me that the M* star-system is a moneymaker for M* . I notice that most MF ads also include what the M* rating is. Wonder how much it cost ad advertiser to have those in the ad?
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Re: Morningstar responds to Wall Street Journal article
This was featured on Nightly Business Report too, the Wall Street Journal reporter was interviewed. I forget what night that ran.[/quote ]
I saw it last night on NBR.
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Re: Morningstar responds to Wall Street Journal article
Their main source of income is ad revenue. All of the ads I've seen are from the financial industry, which is one of the most lucrative niches in online advertising.
That being said, I find value in Morningstar. If you don't want to learn how to use their ratings, or do basic research that that's not their fault.
My only complaint is articles by Rakenthaler's are often biased. He's just a shill for the mutual fund industry.
Re: Morningstar responds to Wall Street Journal article
I am kind of curious who uses Morningstar ratings in their investing any longer? Individuals seem to be focused on cost. I'm curious for people who used to be with Edward Jones etc.--were funds selected for you there based on M* ranking? My understanding ha been that there are a couple of fund families that they work with and the advisor will construct a fairly well diversified portfolio of high-cost funds. Given the fact that I never hear of an advisor who put their client into Vanguard Wellington (a 5 star fund), I'm not seeing where advisors use Morningstar to select funds.
I guess what I'm suggesting is that Morningstar ratings are like, so 20 years ago. Where was the WSJ then?
I guess what I'm suggesting is that Morningstar ratings are like, so 20 years ago. Where was the WSJ then?
- Taylor Larimore
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Re: Morningstar responds to Wall Street Journal article
Bogleheads:
Morningstar is by far the best source of independent information about mutual funds.
I am grateful.
Best wishes.
Taylor
Morningstar is by far the best source of independent information about mutual funds.
I am grateful.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Morningstar responds to Wall Street Journal article
Me.
I use 3, 5 and 10 year star ratings less than *** to remove losers. (Morningstar data)
I use e/r less than x% of category average to remove high cost funds. (Morningstar data.)
I use management tenure > five years to disregard meaningless old data. (Morningstar data.)
I use style box breakdown of funds to get all the fund companies on a common basis. (Morningstar data.)
I use analysts reports to see if there have been recent changes in fund company policies. (Morningstar data.)
I can put two funds side by side to compare past performance both return and variance over multiple time periods and also portfolio composition. (morningstar data.)
I use rolling return charts to compare multiple funds over many time periods and endpoint to see how they rrspond during times of market stress. (Morningstar data.)
If you only use fund company data you are often comparing apples with grapefruit. Bad idea.
Star ratings are just a start but a very important part of the analysis.
(Note that nowhere do I ever ask which fund beat which in the past.)
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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Re: Morningstar responds to Wall Street Journal article
Morningstar data is about the only alternative to Fund Co. Data?
Am I correct that if a fund that recently had showed a good 10 year return suddenly does a bad patch-like losing 10% over a year or quarter-then the 10 year figure will come down noticeably also? (as well as the year to date and one year figures)
Am I correct that if a fund that recently had showed a good 10 year return suddenly does a bad patch-like losing 10% over a year or quarter-then the 10 year figure will come down noticeably also? (as well as the year to date and one year figures)
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Re: Morningstar responds to Wall Street Journal article
Wakefield1:Wakefield1 wrote: ↑Sat Oct 28, 2017 3:41 pm Morningstar data is about the only alternative to Fund Co. Data?
Am I correct that if a fund that recently had showed a good 10 year return suddenly does a bad patch-like losing 10% over a year or quarter-then the 10 year figure will come down noticeably also? (as well as the year to date and one year figures)
You are correct.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Morningstar responds to Wall Street Journal article
I can see Morningstar articles on mutual funds by going to my local Library www. "research portal" and logging on using my library card #.
Still can't predict which ones will gyrate up or down.
Still can't predict which ones will gyrate up or down.
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Re: Morningstar responds to Wall Street Journal article
Many libraries (mine, at least) have a complete subscription to Morningstar which can be very useful for investors. I'd advise those interested to check.Wakefield1 wrote: ↑Sat Oct 28, 2017 3:50 pm I can see Morningstar articles on mutual funds by going to my local Library www. "research portal" and logging on using my library card #.
Still can't predict which ones will gyrate up or down.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
Re: Morningstar responds to Wall Street Journal article
The raw data that Morningstar uses comes from the funds in a format that meets Morningstar's format. Morningstar then presents that data in a format that is consistent for all funds. This eliminates different funds presenting data in inconsistent ways.Wakefield1 wrote: ↑Sat Oct 28, 2017 3:41 pm Morningstar data is about the only alternative to Fund Co. Data?
As an example for Vanguard Developed Markets Index Fund
Vanguard has:
0.00% Emerging Markets
55.00% Europe
36.10% Pacific
0.40% Middle East
8.40% North America
0.10% Other
And Morningstar has in part:
- Greater Europe 54.75 (Total)
United Kingdom 15.33
Europe Developed 38.96
Europe Emerging 0.02
Africa/Middle East 0.44
The key is "independent"Taylor Larimore wrote: ↑Sat Oct 28, 2017 11:33 am Bogleheads:
Morningstar is by far the best source of independent information about mutual funds.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.