Morningstar Advisor - February/March 2013 - (Page 40)

Spotlight around the fact that Treasuries don’t appear to offer much return potential at this stage, either from capital appreciation—which would require yields to fall even further— or from income. The latter is a crucial point in the context of after-inflation returns, in particular. At current levels, many Treasury bond yields won’t be sufficient to overcome, much less keep up with, inflation at its current run rate. Morningstar Advisor Magazine—Don’t Miss an Issue! Subscribe for FREE today! Call +1 888 235-0828 or visit MorningstarAdvisor.com Reach the advisor audience. Reserve your ad space today: April/May 2013: Risk: What is risk and what can investors do about it? We ask our equity and fund analysts to explore strategies to help advisors mitigate the risk and uncertainty in their clients’ portfolios. Ad Close: Fev. 15, 2013 Materials Due: Mar. 1, 2013 For more information, contact: Mary Uribe, Mary.Uribe@morningstar. com, +1 312 384-3811 Online media kit: www.morningstar.com/aboutus/ mediakit.html One can reasonably argue, though, that it isn’t fund managers straying from the index that’s been causing this phenomenon, but that the index is straying from them. That owes much to the fact that increased Treasury bond issuance has consumed a larger percentage of the benchmark. That allocation numbered just below 25% at the end of 2006, for example, but clocked in at 36% by the end of November. Conversely, while index rules have long kept exposures to commercial mortgages and asset-backed securities relatively modest, they’ve dropped to a combined 6.9% of the index as of November, down from nearly 15% at the end of 2006. Whatever the root cause of the shift, however, the differences have real implications for how investors evaluate their funds. On a basic level, it means that other so-called Modern Portfolio Theory statistics such as beta and alpha—which are often used as proxies for a fund’s volatility and outperformance, respectively—are much less useful. That’s because they only tend to be as statistically meaningful as the benchmark is correlated to the investment in question. The lower a fund’s R-squared, the less useful are the rest of its stats. The Benchmark Problem That raises the broader issue of benchmarking in general. Generally speaking, a benchmark index ought to contain all of the securities in a manager’s investable universe. That the Barclays Aggregate hasn’t really lived up to that need for some time isn’t really news, of course. What’s clearly different today, 40 Morningstar Advisor February/March 2013 however, is that we appear to be transitioning into a new phase in which even broad outlines of the index’s performance behavior are proving less useful as signposts than they once were. There’s no easy solution to this problem and little indication that Wall Street is eager to begin work on building broader, more-representative indexes that better match what fund managers are doing. For all of their importance, meanwhile, benchmarks are not necessarily designed and operated for the purposes or benefit of the end investor. Rather, they tend to reflect what investment banks find are the demands of their direct customers— many of whom are fund managers—and what it is that they’re trying to sell them. Ultimately, though, the most pressing concern may be one of understanding portfolio risk. The good news is that the handful of catastrophes and close calls that occurred during the financial crisis appears to have encouraged many firms to take a second and third look at the risks they take in portfolios and how to try to make sure they don’t spin out of control should we again experience a market disruption on the scale of 2008. Yet with so many funds branching out of their former comfort zones and investing in areas that once occupied little or no space in their core portfolios, the risk that investors will get something other than they bargained for has inevitably gone up. K Eric Jacobson is a senior fund analyst on the active funds research team at Morningstar. http://www.MorningstarAdvisor.com http://www.morningstar.com/aboutus/mediakit.html http://www.morningstar.com/aboutus/mediakit.html

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2013

Morningstar Advisor - February/March 2013
Contents
Contributors
Letter From the Editor
Social Media, the Old- Fashioned Way
Do You Use Active Strategies?
Youth Appeal
How to Buy the Unloved 2013
Morningstar Managers of the Year
Investments á la Carte
Investment Briefs
Approaches to Absolute-Return Investing
In Agriculture, It’s Good to Be Strong
Yes, There Are Good Active Funds
The Decoupling
Where It Could Pay to Be Active
The Active Fund That Defies Obsolescence
The Epitome of an Active Manager
Lines of Communication
The Existence of Market Timing ‘Intelligence’
A Route to Commodities that Bypasses the Futures Market
Best Positioned for Health-Care Reform
Diversified Stock Funds That Earn Their Stars
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
A Twisted Debate

Morningstar Advisor - February/March 2013