Milwaukee-based Fiduciary Management Inc. plans to debut its large-cap strategy as a semi-transparent exchange-traded fund, according to a May 5, 2021, regulatory filing. The roughly $9.5 billion strategy has been in outflows for years and is now 40% smaller than at its late-2014 peak.
FMI’s decision to enter the ETF marketplace comes in the wake of other active managers doing the same, including Capital Group and T. Rowe Price. The ETF wrapper comes with certain advantages relative to traditional open-end vehicles, most notably tax efficiency and lower fees. Capacity management is a disadvantage, though. Firms cannot close ETFs to new investors to preserve market-cap flexibility as they can with an open-end funds.
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Susan Dziubinski: Hi, I m Susan Dziubinski with Morningstar. Morningstar recently published its global guide to strategic-beta products. To provide an update on the state of this part of the market is Ben Johnson. Ben is Morningstar s director of global exchange-traded fund research. Hi, Ben. Thanks for being here. Ben Johnson: Hi, Susan. Thanks for having me.
Dziubinski: Let s start out with the definition. How do we define strategic-beta funds?
Johnson: I think the easiest way to define it is if we pick that term apart and look at its two constituent words. So, strategic or strategy implies that there is a strategy here. It s an investment strategy that in some way deviates from whatever its starting point might have been, which is often a broad-based market-cap-weighted index. So, say, a Total U.S. Stock Index, say an Aggregate Bond Index, something of that sort.
Happy Talk, Unhappy Consequences
Wall Street analysts are far likelier to praise stocks than to bury them. According to FactSet, which tracks the Street’s proclamations, 55% of S&P 500 stock ratings are Buys, 38% are Holds, and 7% are Sells. The three highest-ranking analysts on a competitive site, tipranks.com, are even more optimistic. On average, those investment professionals score 79% of the equities that they track as Buys, 19% as Holds, and 2% as Sells.
If that doesn’t worry you, it should. The facts overlay bad intentions. Frequently, companies browbeat Wall Street banks into giving them higher ratings. They threaten to withhold information; move their investment banking business elsewhere; or refuse to participate in institutional-client meetings. Their efforts are broadly successful. Analysts tend to act as my mother advised: When they can’t say something nice, they don’t say anything at all.
As laggard value stocks have come back into favor over the past two quarters, it has given a boost to a number of struggling mutual funds with deep-value strategies. Meanwhile, funds that land in the value Morningstar Categories but tend to hold stocks with stronger earnings-growth profiles have seen their fortunes turn for the worse.
We drilled down into Morningstar s large-value category to look for funds that have had significant swings higher or lower in their category rankings. To do so, we compared funds one-year return rankings as of Sept. 30, 2020, with their rankings six months later.
These time frames featured two distinct periods in the dynamic between value and growth stocks. From Oct. 1, 2019, through Sept. 30, 2020, we captured some of the worst performance on record for value stocks when compared with growth stocks. During this period, the Morningstar US Large Value Index declined 7.1% and was left far in the dust by the Morningstar US Large Growth Index s 40.5% r