Fund Rating Systems

“Markov Processes also examined the relationship between volatility and performance of all 700 funds over both periods. It found that conservatively constructed funds that exhibited lower volatility (beta) than the market were more consistently top-ranked in the first period, which included the financial crisis. But higher beta (more volatile) funds tended to be more prominent among the better performers in the later 10-year period when the crisis had faded. Markov found a “near linear relationship” between funds’ risk-adjusted returns rankings and performance since the crisis.” Read the full article here (subscription required).

William Frank, director of client Research at MPI, joins Money Life with Chuck Jaffe to discuss the recent shakeup in U.S. mutual fund ratings as highlighted in our research series on ratings. His segment begins at 00:29:14.

“Low beta funds have seen their Morningstar ratings drop significantly since the tail end of the 2008 financial crisis fell out of the 10-year lookback window used to rate performance. According to research by Markov Processes International, nearly 15% of US equity funds saw their 10-year Morningstar ratings change by at least two stars in the 12 months to the end of April – a 500% increase over the prior year.” Read the full article here. (subscription required)

“Quantitative expert Michael Markov, co-founder of New Jersey-based Markov Processes International, points out that at the end of 2017, the S&P 500 had averaged annualised returns of 8.5 per cent over the previous 10 years – perfectly healthy, if undramatic, returns. By February 2019, however, 10-year annualised returns had almost doubled to 16.7 per cent. Casual investors who noticed the sudden jump in 10-year returns might think 2018 was a spectacularly good year for stock markets, but that’s not the case at all, with indices actually slipping last year.” Read the full article here.

In this post, our research team examines why investors should proceed with caution when selecting top-ranked funds.

“What is an investor to do when the long view of the market changes, not because of anything happening now, but because of events that took place a decade or more ago?… Michael Markov, a founder of the research firm Markov Processes International, whose studies brought the significance of the fluctuating 10-year returns to my attention, said that nothing had happened lately to make investing a better long-term bet.” Read the full article here. (subscription required)

While the health of the bull market, the raging fee wars and the ongoing active vs. passive debate continue to capture the money management industry’s attention, something fascinating has quietly taken place on fund analysts’ radars.