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Morgan Stanley: A Deeper Look at Performance

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Investment banking and securities trading can be volatile businesses. So it's not surprising to see many leading players in these fields moving deeper into fee-based services — not only to diversify their revenue bases but also as a way of generating more consistent income streams. 

One of the biggest dealmakers in this regard has been Morgan Stanley. For decades, the venerable New York-based investment banker and institutional broker has consistently ranked among the top five 'bookrunners' in terms of revenue production, according to Morningstar.

Tracing its roots back to 1924, the publicly traded company (NYSE: MS) entered 2021 with reported net revenue topping $48 billion and employing more than 63,000 workers worldwide. Roughly half of the company's pre-expense income was generated from its institutional securities business, while the rest came from asset and wealth management.1  

In late 2020, Morgan Stanley struck a deal to buy funds manager Eaton Vance. Early estimates projected the $7 billion acquisition to nearly double assets under management for the bank's investment management unit to around $1.2 trillion, according to Reuters.

In announcing the deal, company executives expressed hope of making "minimal" changes to the Eaton Vance lineup and Morgan Stanley's family of funds. But in a review of the deal, Barron's pointed out that large mergers in asset management typically "prompt" fund closures and other cost-cutting measures. "That can cause headaches for fund investors," the magazine noted.3

The Eaton Vance acquisition followed on the heels of Morgan Stanley agreeing in early 2020 to buy E-Trade Financial. The discount brokerage came with a reported price tag of $13 billion and more than five million client accounts. The bank's executives indicated at the time they were planning to retain the E-Trade brand and operate it as a distinct platform. 

Morgan Stanley's expansion in asset and wealth management includes purchasing Smith Barney in early 2009, a time when investors were still gripped in the Great Recession's throes. That deal added more than 17,000 financial advisors and $2 trillion in client assets to the parent's fold. 

Given its rather expansive designs to move deeper into investment management and brokerage services, we thought it'd be worthwhile to put under our research microscope Morgan Stanley's active mutual funds. This analysis is part of our ongoing Deeper Look series, which investigates claims by managers of peer performance superiority by holding them to a higher standard — i.e., how they've done over longer periods against their respective indexes.

Controlling for Survivorship Bias

It's important for investors to understand the idea of survivorship bias. While there are 40 active mutual funds with five or more years of performance-related data currently offered by Morgan Stanley, it doesn't necessarily mean these are the only strategies this company has ever managed. In fact, there are 116 mutual funds that no longer exist. This can be for a variety of reasons including poor performance or the fact that they were merged with another fund. We will show what their aggregate performance looks like shortly.  

Fees & Expenses

Let's first examine the costs associated with Morgan Stanley's surviving 40 strategies. It should go without saying that if investors are paying a premium for investment "expertise," then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, sales loads — front-end (A), back-end (B) and level (C) — as well as 12b-1 marketing fees. These are considered the "hard" costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds.

Commissions and market impact costs are real expenses associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades executed by portfolio managers.

We can estimate the costs associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in one year. This is considered an active approach, and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities, such as short- and long-term capital gains distributions, than those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 40 surviving active funds offered by Morgan Stanley that have at least five years of complete performance history. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also, remember that this is what is considered an in-sample test; the next level of analysis is to do an out-of-sample test (for more information see here).

Fund Name Ticker Turnover Ratio % Prospectus Net Expense Ratio Global Broad Category Group
Morgan Stanley Pathway Intl F/I TIFUX 437.00 1.11 Global Fixed Income
Morgan Stanley Pathway Municipal Bd TMUUX 10.00 0.73 US Municipal Fixed Income
Morgan Stanley Pathway Core F/ I TIIUX 216.00 0.56 US Fixed Income
Morgan Stanley US Government Secs I USGDX 167.00 0.52 US Fixed Income
Morgan Stanley Inst Corporate Bond I MPFDX 133.00 0.70 US Fixed Income
Morgan Stanley Inst Short Dur Inc I MPLDX 74.00 0.30 US Fixed Income
Morgan Stanley Global Fixed Inc Opps I DINDX 106.00 0.60 US Fixed Income
Morgan Stanley Mortgage Securities I MTGDX 233.00 0.70 US Fixed Income
Morgan Stanley Inst Strategic Income IS MSTCX 161.00 0.57 US Fixed Income
Morgan Stanley Inst Core PlsFxdInc Instl MPFIX 287.00 0.42 US Fixed Income
Morgan Stanley Pathway Hi Yld THYUX 84.00 0.86 US Fixed Income
Morgan Stanley Inst High Yield I MSYIX 69.00 0.65 US Fixed Income
Morgan Stanley Inst EMkts FxdInc Opps I MEAIX 58.00 0.85 Emerging Markets Fixed Income
Morgan Stanley Inst Asia Opp IS MSAYX 27.00 1.05 Asia ex-Japan Equity
Morgan Stanley Inst International Opp I MIOIX 20.00 1.00 Global Equity Large Cap
Morgan Stanley Inst Intl Advtg I MFAIX 15.00 1.00 Global Equity Large Cap
Morgan Stanley Pathway Intl Eq TIEUX 39.00 0.71 Global Equity Large Cap
Morgan Stanley Inst Active Intl Allc I MSACX 34.00 0.90 Global Equity Large Cap
Morgan Stanley Inst International Eq I MSIQX 20.00 0.95 Global Equity Large Cap
Morgan Stanley Inst Global Franchise I MSFAX 16.00 0.93 Global Equity Large Cap
Morgan Stanley Inst Global Opp I MGGIX 15.00 0.95 Global Equity Large Cap
Morgan Stanley Inst Global Sustain I MGQIX 14.00 0.90 Global Equity Large Cap
Morgan Stanley Inst Global Advtg I MIGIX 95.00 1.10 Global Equity Large Cap
Morgan Stanley Inst Frontier Mkts I MFMIX 68.00 1.85 Global Emerging Markets Equity
Morgan Stanley Inst EMkts Sm Cp I MSEMX 69.00 1.30 Global Emerging Markets Equity
Morgan Stanley Inst EMkts Ldrs I MELIX 58.00 1.20 Global Emerging Markets Equity
Morgan Stanley Pathway Em Mkts Eq TEMUX 23.00 0.84 Global Emerging Markets Equity
Morgan Stanley Inst Emerging Mkts I MGEMX 58.00 1.05 Global Emerging Markets Equity
Morgan Stanley Europe Opportunity I EUGDX 85.00 1.05 Europe Equity Large Cap
Morgan Stanley Inst Global Strat Instl MPBAX 109.00 0.74 Moderate Allocation
Morgan Stanley Inst Growth I MSEQX 87.00 0.59 US Equity Large Cap Growth
Morgan Stanley Inst Advantage I MPAIX 70.00 0.85 US Equity Large Cap Growth
Morgan Stanley Insight I CPODX 93.00 0.91 US Equity Large Cap Growth
Morgan Stanley Pathway Large Cap Eq TLGUX 21.00 0.49 US Equity Large Cap Blend
Morgan Stanley Inst Inception I MSSGX 99.00 1.00 US Equity Small Cap
Morgan Stanley Pathway Sm-Mid Cap Eq TSGUX 45.00 0.62 US Equity Mid Cap
Morgan Stanley Inst Discovery I MPEGX 65.00 0.74 US Equity Mid Cap
Morgan Stanley Inst Glbl Infras I MTIIX 30.00 0.97 Infrastructure Sector Equity
Morgan Stanley Inst Global Real Est I MRLAX 24.00 1.00 Real Estate Sector Equity
Morgan Stanley Inst US Real Estate I MSUSX 21.00 0.90 Real Estate Sector Equity
Please read the prospectus carefully to review the investment objectives, risks, charges and expenses of the mutual funds before investing. Morgan Stanley mutual fund prospectuses are available at https://www.morganstanley.com/im/en-us/individual-investor/resources.desktop.html

On average, an investor who utilized a surviving active equity mutual fund strategy from Morgan Stanley experienced a 0.96% expense ratio. Similarly, an investor who utilized a surviving active bond strategy from the company experienced a 0.66% expense ratio.

These expenses can have a substantial impact on an investor's overall accumulated wealth if they are not backed by superior performance. The average turnover ratios for surviving active equity and bond strategies from Morgan Stanley were 46.58% and 156.54%, respectively. This implies an average holding period of 7.67 to 25.76 months.

In contrast, most index funds have very long holding periods — decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long-term. Again, turnover is a cost that is not itemized to the investor but is definitely embedded in the overall performance.

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Morgan Stanley's implementation of active management. We compare all of its 156 strategies, which includes both current funds and funds no longer in existence, against its Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition.

We have included alpha charts for each of their current strategies at the bottom of this article. Here is what we found:

  • 87.82% (137 of 156 funds) have underperformed their respective benchmarks or did not survive the period since inception.

  • 12.18% (19 of 156 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha.

Here's the real kicker, however:

  • 1.92% (3 of 156 funds) wound up outperforming their respective benchmarks consistently enough since inception to provide 97.5% confidence that such outperformance would persist (as opposed to being based on random outcomes).

As a result, this study shows that a majority of funds offered by Morgan Stanley have not outperformed their Morningstar-assigned benchmark. The inclusion of the statistical significance of alpha is key to this exercise, as it indicates which outcomes are due to a skill that is likely to repeat and those that are more likely due to a random-chance outcome.

Regression Analysis

How we define or choose a benchmark is extremely important. If we relied solely on commercial indexes assigned by Morningstar, then we may form a false conclusion that Morgan Stanley has the "secret sauce" as active managers.

Since Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio.

A better way of controlling these possible discrepancies is to run multiple regressions where we account for the known dimensions (betas) of expected return in the U.S. (i.e., market, size, relative price, etc.).

For example, if we were to look at all of the U.S.-based strategies from Morgan Stanley that've been around for the past 10 years, we could run multiple regressions to see what each fund's alpha looks like once we control for the multiple betas that are being systematically priced into the overall market.

The chart below displays the average alpha and standard deviation of that alpha for the past 10 years through 2020. Screening criteria include funds with holdings of 90% or greater in U.S. equities and uses the oldest available share classes.

As shown above, although two mutual funds had a positive excess return over the stated benchmarks, none of the equity funds reviewed produced a statistically significant level of alpha, based on a t-stat of 2.0 or greater. (For a review of how to calculate a fund's t-stat, see the section of this study that follows the individual Morgan Stanley alpha charts.)

Why is this important? It means that if we wanted to simply replicate the factor risk exposures of these Morgan Stanley funds with indexes of the factors, we could blend the indexes and capture similar returns. 

Conclusion

Like many of the other large active managers, a deep analysis into the performance of Morgan Stanley has yielded a not so surprising result: Active management is likely to fail many investors. This is due to market efficiency, costs and increased competition in the financial services sector.

As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold and rebalance a globally diversified portfolio of index funds.

Below are the individual alpha charts for the existing Morgan Stanley actively managed mutual funds that have five years or more of a track record.

 


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Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.

The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.

Footnotes:

1.) Morgan Stanley, "Fourth Quarter and Full Year 2020 Earnings Results," Jan. 20, 2021. 

2.) Reuters, "Morgan Stanley to buy Eaton Vance for $7 billion in investment-management push," Oct. 8, 2020. 

3.) Barron's, "Morgan Stanley and Eaton Vance Could Prune Funds," Oct. 16, 2020. 


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.