Morningstar Fund Rankings

Morningstar’s new fund rankings, supposedly predicting future performance of funds, has one year of data we can look at to see how they are doing.  Because they claim an entire market cycle must be completed before they can judge their analysis it is hard to tell how they are doing, but the Wall Street Rant Blog has a good analysis:

“The Analyst Rating is based on the analyst’s conviction in the fund’s ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. If a fund receives a positive rating of Gold, Silver, or Bronze, it means Morningstar analysts think highly of the fund and expect it to outperform over a full market cycle of at least five years.

Now it should be clear that these ratings are longer-term in nature so take the following breakdown with a grain of salt but I said I would follow-up on these so I am.

First lets start with a review of what the distribution of Morningstar’s Analyst Ratings looked like at the start of 2012 (click on the images to enlarge):


While the distribution of ratings has gotten a little better it remains a mystery why Morningstar has an allergic reaction to assigning negative ratings. As of the start of 2013 they have now rated 1069 funds but only 52 (or less then 5%) have negative ratings. Although the neutral ratings have increased to 28%, Bronze to 25%, Silver is down to 24% and Gold down to about 18%.

Without further ado, below is how the rated funds performed in 2012. These only include funds rated at the start of 2012:

Mstar Analyst Rating Performance 2012

Not much really stands out after the first year. While their was a slight positive result for Gold and Silver rated funds, Neutral rated funds did even better. As for Bronze and Negative rated funds, outperformance was pretty much a coin flip.

Below is the Average Rank for each, as you can see Neutral rated funds performed the best and Negatively rated funds performed the worst.

MStar Rank 2012

Take this for what it’s worth, which at this point is not much because full market cycles are indeed a better measuring stick. For instance, in 1999 and 2006/2007 a lot of bad managers did good thinking the unsustainable was in fact sustainable while a lot of good managers did bad as they realized irrationality when they saw it. However, this is at least a starting point for looking at the performance of these Analyst Ratings. 

 Source:  Wall Street Rant Blog


Gamechanger: Health Care Costs are Slowing

A very interesting piece from the NYT about the slowdown in health care costs in the US.  Seeing that all of the massive budget deficit projections revolve around out of control healthcare spending, this is a trend that is worth following.  The implications could be large, as many have concluded that increased costs are going to cause consumers and businesses to contract spending in other areas just to pay for healthcare.  If this trend continues this could be very bullish and may increase the outlook for the US economy.  Here is the excerpt from the article:

In figures released last week, the Congressional Budget Office said it had erased hundreds of billions of dollars in projected spending on Medicare and Medicaid. The budget office now projects that spending on those two programs in 2020 will be about $200 billion, or 15 percent, less than it projected three years ago. New data also show overall health care spending growth continuing at the lowest rate in decades for a fourth consecutive year.

Health experts say they do not yet fully understand what is driving the lower spending trajectory. But there is a growing consensus that changes in how doctors and hospitals deliver health care — as opposed to merely a weak economy — are playing a role. Still, experts sharply disagree on where spending might be in future years, a question with major ramifications for the federal deficit, family budgets and the overall economy. 


Europe Is Cheap

Here is a recent chart from Societe Generale looking at the cyclically adjusted P/E ratio (CAPE).  This is the price of the stock market divided by an average of the earnings over the last 10 years.  It is meant to smooth out the inevitable volatility in earnings.  What we see is that the US is basically in-line with the average over the past 30+ years, while Europe is at some of the lowest levels since the early 1980s.  

Greenspring has a neutral weighting here, but I think it warrants some additional research.


Source: Société Générale


Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.