Morningstar Advisor - April/May 2011 - (Page 58)

Gray Matters The Tamer Ride By Maciej Kowara Consistent returns and asset flows help explain why fund companies price bond funds cheaper than stock funds. Having spent years doing manager research at Morningstar, specializing in fixed-income managers, I have an appreciation for the level of sophistication that bond managers apply to their analysis. Their research into credit quality, collateral status, cash flows, optionality embedded in some bonds, and legal provisions that envelope most fixed-income issues makes for a very complex exercise. And there are no exchanges for bonds, so trading is more difficult and involves more effort. Therefore, I have to roll my eyes when I hear the argument that stock investing is more difficult than bond investing. Most people would agree that the bond departments of PIMCO, BlackRock, Western, and Fidelity are deep into some serious research. How many stock shops do the equivalent of recalculating the durations and option-adjusted spreads of every one of the thousands of bonds in the BarCap Aggregate Index every night? Yet despite this sophistication, mutual fund firms charge less for fixed-income funds than they do for stock funds. According to Morningstar Direct, the average expense ratios for each Morningstar open-end category in the world’s three biggest capital markets (the United States, Europe, and Japan) are remarkably consistent: Firms price equity funds higher than bond funds. Below are the averages for the three markets1: Country Equity Bonds United States Europe Japan 1.60 1.93 1.95 1.02 1.06 1.45 58 Morningstar Advisor April/May 2011

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2011

Morningstar Advisor - April/May 2011
Letter From the Editor
The Debate That Matters Most
What Can the Mutual Fund Industry Do Better?
Cool Logic, Warm Intent
How to Start a Mutual Fund
Owner and Operator
Middle East Revolts Roil Oil Markets
Four Picks for the Present
Investment Briefs
How We Improve Our Odds of Picking Outperformers
Health Care Survived 2010, but Investors Want Proof
The Global Fund-Leadership Playoffs: Europe vs. the United States
U.S. Fund Investors Have It Good
U.S. Fund Firms Learn to Speak UCITS
Balancing Act
The Tamer Ride
Investors Lend a Hand
Healthy, Wealthy, and Wide
Foreign Funds That Win at Concentration
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VAs Finish 2010 With a Solid Gain
Buying Good Funds, Poorly

Morningstar Advisor - April/May 2011