Morningstar - Summer 2019 - 7

Letter From the Editor

Phantom Tollbooth

Jerry Kerns

Marty Whitman, the late legendary manager
of Third Avenue Value Fund TAVFX, once joked that
the mutual fund business was so lucrative
that "it's better than having a tollbooth on the
George Washington Bridge."
Whitman was the quintessential star manager
in the heyday of the active manager in the 1990s
and early 2000s. He ran an unconventional
strategy, wrote entertaining shareholder letters,
and regularly outperformed the market. His
success and personality attracted billions of dollars
in assets to the firm he founded, Third Avenue
Management. But then came the financial crisis
in 2008, and the firm's funds struggled. As
performance waned, managers and analysts left.
Whitman himself stepped away from his
flagship fund in 2012. Shareholders headed for the
exits with them. Third Avenue Management
had $26 billion in assets in 2006. Today, it has less
than $3.5 billion.
Third Avenue's story has its own unique set
of circumstances, but in many ways, it's
emblematic of how the asset management
business is changing. Most investors today are not
willing to stick with underperforming funds,
especially when cheaper, more successful
investment options are so readily available. The
asset management business is still profitable,
but as Morningstar analyst Greggory Warren
writes in this issue's Spotlight, asset managers are
facing significant secular headwinds that
are permanently altering the industry-and not in
ways that necessarily benefit them ("A New Era
for Asset Managers," Page 41). Some fund
firms are weathering the storm better than others
(see BlackRock BLK and T. Rowe Price TROW),
but the competitive advantages in the industry as
a whole are eroding. To survive, Warren says,
companies must give investors better experiences
at lower costs. For many firms, this will be a tall
order. For investors, having fund companies
scratch and claw in a highly competitive landscape

for their cherished assets should lead to
better, cheaper options. No longer do investors
have to settle for mediocrity.
What makes a good fund company? Morningstar's
manager research team, led by analyst Bridget B.
Hughes, provides extensive research on fund
families and has shown that there is a connection
between how firms treat shareholders and
the performance of their funds. That's why the
Parent rating is one of the five pillars that analysts
consider in their Morningstar Analyst Ratings.
Twice a year, Morningstar publishes the Fund
Family 150, a report on the largest fund families. In
"Upstanding Families" (Page 50), we take
a close look at 10 popular firms to see if they're
good parents.
AR-Enabled

If you haven't already, download the Morningstar
AR app onto your mobile device, point your
camera at the cover, and watch it come to life. For
the first time, Morningstar magazine is AR-enabled,
allowing us to offer digital features alongside
our print publication. Watch video interviews with
authors Greggory Warren (in Spotlight) and Paul D.
Kaplan (Quant U) that give more information
about their articles. Go to the Data Dashboard to
view historical data to spot trends. We
look forward to rolling out more AR features
in subsequent issues. Let me know what you think
at magazine_editor@morningstar.com.

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Morningstar - Summer 2019

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