yawning

Morningstar's Fund Managers of the Year

yawning

Can you hear it? That is the sound of millions of index fund investors yawning in response to Morningstar’s announcement of its Fund Managers of the Year for 2013. That recent performance weighs very heavily in the awarding of this distinction is evidenced by the fact that one of the awardees (AQR Managed Futures Strategy) has only been around for four years.

As in past years, IFA took the liberty of running a statistical analysis of the returns generated by these managers to see if luck or randomness could be ruled out as the explanation. Specifically, we compared the series of calendar year returns (beginning with the year in which at least one member of the current team was a manager of the fund) vs. the Morningstar Analyst-assigned benchmark. Only one (Artisan Global Value Investor) of the eight funds analyzed was found to have alpha that was statistically significant (t-stat greater than two). However, this calculation was based on only six years of data, and a similar fund (Artisan International Value Investor) for which we have eleven years of data was found not to have significant alpha. Both funds are shown below.

 

 

 

 

 

 

 

At IFA, we have often talked about the need for a couple of decades of data before concluding the presence of skill, and the funds above are no exception. The average number of years of similar returns needed for all eight of the funds is thirty-two years. While two of the funds appear to need less than twenty years of data, both of those funds have only six years of data to start with. This means that the probability of a false significant alpha (i.e., a false positive) is much higher than it would be with say twenty years of data.

Interestingly, in the category of domestic equities, Morningstar selected the team that manages four of Morgan Stanley’s growth funds. On the international side, the two artisan funds chosen both have “value” in their name, yet neither one is categorized as a value fund. In fact, one of them (Artisan Global Value Investor) is categorized as a growth fund. Based on a thorough review of 86 years of data, IFA does not advise the use of growth-tilted funds for long-term investors.

As with all these types of distinctions awarded to active managers, IFA views them as nothing more than a distraction. Unfortunately, they are a distraction that can lead certain naïve investors onto the treadmill of performance-chasing. In Step 5: Manager Pickers, IFA brings a massive amount of data and studies showing that track-record investing simply does not work. While we at IFA absolutely depend on Morningstar for a lot of the data we use, we encourage them to do away with the star ratings and the manager of the year awards.