Don DeMuth Quoted and Pictured in Wall Street Journal Cover Story

 

We are pleased to announce that Don DeMuth was pictured in a cover story in the October 26, 2017 edition of The Wall Street Journal entitled, “Mutual-Fund Ratings Are Not What They Seem.” The Journal sought Don’s perspective as a fee-only advisor who regularly uses Morningstar research.

The article discusses Morningstar’s star rating system, which scores mutual funds on a one-to-five-star scale, and the widespread effects of these ratings in the financial industry, including:

  • Investor and advisor reliance on the ratings
  • Mutual fund advertising
  • Influence on mutual fund inflows and outflows

The Journal notes that generally, 5-star funds outperform 4-star funds, which outperform 3-star funds, which outperform 2-star funds, which beat 1-star funds. However, the article also discusses the difficulty in maintaining a five-star rating over time, because manager performance often “reverts to the mean” (i.e., the fund behaves more like its peers, rather than above them).

In the article, Don mentions his use of Morningstar Office software to organize and analyze client portfolios. He also uses Morningstar data to check fund performance and other metrics.

Regarding star ratings, Don is quoted as saying: “With rare exception, we would want a fund to have five stars.”

 

Morningstar tells the Journal, “The star rating works well when it’s used as intended: as a first-stage screen that helps identify lower-cost, lower-risk funds with good long-term performance. It is not meant to be used in isolation or as a predictive measure.”

For years, MOSAIC has been using the ratings as just that: “a first-stage screen” in fund selection. Some of our other criteria include:

  • Net return
  • Alpha coefficient (risk-adjusted return)
  • Expense ratio

As there are roughly 900 U.S. mutual funds that receive a five-star rating at any time and MOSAIC maintains a recommended list of 20-30 funds, we only recommend 2-3% of the universe of five-star-rated funds. Further, we continuously monitor each fund position held by our clients and formally review each position every quarter.

Last summer, MOSAIC performed a comprehensive in-house review of Morningstar’s ratings process. We know precisely how the ratings are calculated, and their advantages and limitations. We’ll continue to use them—in conjunction with several other tools—as a means of trying to obtain the highest risk-adjusted returns for our clients.

The original version of the Wall Street Journal article is viewable only to paying subscribers at WSJ.com .

However, the full text is available here.

Mighty Oak Strong America Investment Company | 940 Century Drive, Mechanicsburg, PA 17055
Phone: 717-790-9001 | Fax: 717-790-9031| Email: don.mosaic@comcast.net