FEATURE: FUND PERFORMANCE
negative gap of -2.37% per year. A similar right reasons. Doing this entails being
trend is seen if one looks at the gaps as a responsible about marketing, off ering
PROFILE – FACT BOX
percentage of total return. clear and full disclosure, and taking
Th e pattern is not limited to steps to adequately educate the
diff erences between peer groups. intermediaries that sell their products.
Morningstar studies have also shown With regards to marketing, fund fi rms
the trend to hold true within a given need to refrain from the typical
peer group. Th at is, if one ranks funds practice of marketing whatever the
within a given Morningstar category by hottest asset class is. We saw heavy
standard deviation over a given period, marketing of TMT funds right up to
the highest standard deviation funds the meltdown, even though fund
within each category display larger houses clearly knew their risks. More
negative investor return gaps than the recently, we saw a similar phenomenon
funds with the lowest standard with property funds in the UK
deviations. Based on a comprehensive market. It is tempting to try to gather
study conducted by Morningstar at the assets quickly through such tactics,
end of 2007, we found the high but it is ultimately a poor decision for
standard-deviation off erings within a fund house’s long-term health. A
each peer group to have an average house that is built upon marketing
negative gap of 1.96%. Th e lowest that provides a short-term assets under
standard deviation funds within each management (AUM) boost, but
Christopher Traulsen, CFA
peer group had a negative gap of just ultimately leads investors to have
Career highlights:
0.24%. Put diff erently, even controlling negative associations with the fi rm’s
Christopher Traulsen is head of fund
for factors such as asset class, regional brand is a shabby substitute for
research at Morningstar Europe, and was
focus, market cap and investment style, ensuring that investors have a good
previously director of fund research at
it was more diffi cult for investors to use long-term experience with the fi rm.
Morningstar UK since early 2006. He has
higher-volatility funds well than it was Disclosure is also important – if a
been with Morningstar since 1997.
for them to use lower volatility fi rm’s materials are not clear about
Traulsen has specialised in qualitative
off erings. (See fi gure 1.) what a fund does and the risks it takes,
fund analysis for the past decade, and
investors may well buy it for the
previously led Morningstar’s coverage of
WHY IT MATTERS wrong reasons and end up having a
large fund houses such as Fidelity and
It is all too easy to dismiss these fi ndings poor experience with the product.
Legg Mason in the US. Prior to taking on
as being outside the realm of the fund Morningstar Investor Return™ shows
his new role in the UK, Traulsen authored
provider’s responsibility. Th at would be a that investors often make poor
Morningstar’s monthly Fidelity report,
mistake. While only investors are directly decisions, particularly when it comes to
launched the fi rm’s coverage of ETFs,
responsible for their behaviour, asset volatile off erings. Our data strongly and co-developed Morningstar’s
managers and advisers must also take suggest that fund fi rms and advisers Stewardship Grade for Funds. Traulsen
responsibility. Morningstar data in the who work together to moderate this holds Bachelors degrees from the
US shows that fund houses that have tendency are likely to deliver a much University of California at Berkeley, and a
delivered the smallest negative or highest better investor experience than those Master’s degree from the University of
positive average gaps between their who amplify it by continually pushing
Chicago. He is a CFA charterholder.
funds’ total returns and investor returns the latest ‘hot dot’ products. If houses
have gathered far more assets than their redefi ne success by this standard instead
competitors. Th ere is clearly a higher of short-term AUM growth, we believe
correlation between a fund house’s their investors, the advisers who
ability to gather assets and the investor distribute their funds, and ultimately,
returns of its funds, than exists between the fund houses themselves, will all fare
its ability to gather assets and the total much better in the long-term.
returns of its funds.
Fund houses can help avoid poor
This article is based in part on original
investor returns by ensuring that
research conducted by Morningstar’s
investors buy their funds with
managing director, Don Philips.
appropriate expectations and for the
WWW.CFAUK.ORG PROFESSIONAL INVESTOR 27
25-2725-27 fund performance.indd 27fund performance.indd 27 27/11/0827/11/08 15:52:5715:52:57
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