I attended Morningstar’s online conference for individual investors a little over a week ago. To be honest, I was disappointed. It made me question whether Morningstar is losing relevance to individual investors in an indexing world.
If investing is like fantasy sports — you assemble a team of players and you compete with others who also assemble a team of players — you need information on the players. You look at stats. You follow the latest development on who’s doing well, who’s not doing so well, and who got injured. Things are always in flux. You check in frequently.
Some people still do this with individual stocks. When I go to the library I sometimes still see people study the Value Line binder or read Investor’s Business Daily. There’s no dearth of information or comments on individual companies on business channels on TV. Online brokers supply research reports that automatically spit out quarterly and annual revenue, EBIDA, cash flow, P/E ratio, and everything you care or don’t care about any company. Morningstar rates stocks on economic moat and it gives a fair value estimate to many stocks.
Individual investors soon realized whatever information they gather, it would be too late by the time it reached them. It’s difficult to compete with full time portfolio managers, analysts, and powerful computers. So they buy mutual funds and delegate the picking job to experienced managers and analysts.
Individual investors always hear it’s a stock picker’s market. It follows that it must be important to have the right pickers. That’s where Morningstar comes in. Morningstar reports data on mutual funds and rates them. It gives star ratings based on performance and it gives medal ratings based on its multi-faceted forward-looking evaluation of a fund’s process, performance, people, parent, and price.
That’s very valuable if we are still in the fantasy sports world. I have all the respect for the hard work Morningstar is doing there.
After 40 years, Jack Bogle’s indexing message slowly settles in. Morningstar reported that in 2014 actively managed equity funds had $98 billion net outflows while passive equity funds had $166 billion net inflows, with Vanguard as the lead beneficiary of the inflows.
In an indexing world, do you still need Morningstar as much?
When you are buying an index fund, you care primarily about two things: the expense ratio, and how closely the fund tracks the index. That’s all. You don’t care about this manager or that manager employing this strategy or that strategy under this economic condition or that economic condition.
What if this Vanguard index fund is rated Silver, not Gold? It’s an index fund. It’ll do pretty much what the index does whether it’s rated Bronze, Silver, or Gold. Will the gold-rated fund beat the index fund? Possibly, but if I’m not in the fantasy sports league should I care?
The Morningstar conference still played to the fantasy sports league world. Panelists rattled off names of their favorite funds and fund managers. No doubt many of those funds beat their index fund benchmarks in the past 1, 3, 5, 10 years or longer. Should I be tempted to think that they will continue beating the benchmark? If the answer is yes, then I should research them on Morningstar. If the answer is no, then the information is not relevant to me.
By settling on indexing, I give up the dream of beating the market. I choose not to play in the fantasy sports league. I take whatever the market gives to me, no more, no less. I fully acknowledge and accept that index funds won’t be the best in any 1-, 3-, 5-, or 10-year period. It’s a fact that index funds will never be the best. It’s a different game with different rules.
I realized I don’t go to Morningstar often these days. I still use its Portfolio X-Ray tool sometimes. That’s about it.
Do you still play the fantasy sports game when you invest? Is Morningstar losing relevance to you?
Say No To Management Fees
If an advisor is charging you a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.