the(rise(and(fall(ofnew(funds:(why(some( succeed(and ... · 2016 fall solutions conference october...
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ADVANCING THE FUTURE OF INVESTMENT ADVISORY SOLUTIONS 1
NetMeeting -‐ Wednesday, September 14, 2016 at 12:00 PM Eastern Time
The Rise and Fall of New Funds: Why Some Succeed and Others Don’t
Introduc)on: Arlen Oransky, SVP, Chief Membership and Programs Officer, MMI Presenters: Lee Davidson, Head of Quan=ta=ve Research, Morningstar Madison Sargis, Quan=ta=ve Analyst, Morningstar Dura)on: 50 minutes (including =me allocated for Q&A). Note: This NetMee=ng is closed to members of the media.
ADVANCING THE FUTURE OF INVESTMENT ADVISORY SOLUTIONS 2
Upcoming MMI Events
2016 Fall Solutions Conference October 18-19, 2016 | Boston The Westin Copley Place
Emerging Asset Managers Forum October 4-5, 2016 | New York The Yale Club
Toronto Wealth Management Summit November 15, 2016 | Toronto St. Andrew’s Club & Conference Centre
2017 Sales & Marketing Leadership Summit March 21-22, 2017 | Palm Beach, FL Eau Palm Beach
© 2015 Morningstar. All Rights Reserved. These materials are for information and/or illustration purposes only. Morningstar Investment Management is
a division of Morningstar which includes Morningstar Associates, LLC, Morningstar Investment Services, Inc., and Ibbotson Associates, Inc., all
registered investment advisors and wholly owned subsidiaries of Morningstar, Inc. All investment advisory services described herein are provided by one
or more of the registered investment advisor subsidiaries. The Morningstar name and
logo are registered marks of Morningstar. This presentation includes proprietary materials of Morningstar. Reproduction, transcription or other use, by
any means, in whole or in part, without the prior, written consent of Morningstar is prohibited.
Lee Davidson, CFA, Head of Quantitative Research
Madison Sargis, Quantitative Analyst
What Factors Drive the Success of
a New Fund?
Agenda
We seek to explain the successful launches of funds globally.
gWhat methodology did we use to investigate this question?
gWhat were the results?
gWhat are the key takeaways?
2
Research Question
What are the drivers of a successful launch of a new fund?
g Two perspectives: Asset Manager (Forward Flows) and Investor (Forward Star Rating)
g The drivers we examine is limited to data available within the first 12 months of a new fund launch. The
characteristics are related to the following groups: Fund, Firm, Manager, Portfolio, Style, Category, and Economic.
g Each perspective looks at the same characteristics to see where interests align and diverge
3
Methodology
Our sample includes funds less than 12 months old from January 2005 to March 2013.
gDependent Variables:
gAsset Manager Model: Forward 36 month total flows into fund
g Individual Investor Model: Forward 36 month Morningstar Risk Adjusted Return
gCalculations:
gAll variables are calculated at the fund level: where applicable, asset weighted values were calculated,
otherwise, equally weighted values were used
g22 independent variables are standardized into percentiles by date and category
gMissing data is imputed to the median by date and category
gPerform panel regression and adjust for autocorrelation through time
gGroup funds by equity, fixed income or allocation asset classes.
4
Net Change to Model
We present the estimated impact on flows and Star Rating showing the change when moving from the bottom (0
th
percentile) to the top (100th
percentile) in the category.
0%
1%
2%
3%
4%
0 25 50 75 100
1st percentile fund
Change in category
flow percentiles or
risk adjusted return
Movement of fund through the distribution
Average fund 99th
percentile fund
5
Fees
Fees have an adverse effect on future Star Ratings and attracting future flows.
-3.50
-3.00
-2.50
-2.00
-1.50
-1.00
-0.50
0.00
-3.50
-3.00
-2.50
-2.00
-1.50
-1.00
-0.50
0.00
0 25 50 75 100
Ris
k A
dju
sted R
eturn
Flo
w P
ercentiles
Category Fee Percentiles
Flows Model - Equity
Flows Model - Fixed Income
Flows Model - Allocation
Star Rating Model - Equity
Star Rating Model - Fixed Income
Star Rating Model - Allocation
6
Manager Traits
Manager characteristics have some of the largest effects on future flows and Star Ratings. Portfolio Managers
owning their own fund and obtaining their CFA are strongly correlated with higher flows and Star Ratings.
6.65
4.81
5.34
1.43
6.86
9.84
1.90
1.27
8.89
2.50
4.04
1.08
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Flows Model - Ownership Flows Model - Education Star Rating Model - Ownership Star Rating Model - Education
Equity Fixed Income Allocation
7
Gender
Gender has minimal effect on future Star Ratings but portfolio managers that are perceived to be female are
associated with higher future flows.
0.84
-0.66
2.78
0.02
-1.97
1.27
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
Flows Model Star Rating Model
Equity Fixed Income Allocation
8
Coverage by a Morningstar analyst has an economically meaningful impact on future fund flows and future Star
Ratings. This effect holds regardless of the analyst’s opinion.
Months Since Morningstar Rating
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
0 4 8 12
Ris
k A
dju
sted R
eturn
Flo
w P
ercentiles
Months
Flows Model - Equity
Flows Model - Fixed Income
Flows Model - Allocation
Star Rating Model - Equity
Star Rating Model - Fixed Income
Star Rating Model - Allocation
9
Portfolio Disclosure
Investors show preference for new funds releasing portfolio holdings and place a premium on frequent portfolio
disclosures. Somewhat surprisingly, Star Ratings are correlated similarly.
2.67
0.98
1.48
0.36
7.60
2.16
0.47 0.33
9.72
-2.31
1.04
0.37
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Flows Model - Reported Portfolio Flows Model - Reported Current
Portfolio
Star Rating Model - Reported Portfolio Star Rating Model - Reported Current
Portfolio
Equity Fixed Income Allocation
10
Cannibalization Index
Competition among new funds at the same firm hurts future flows. The more focus a firm can provide to a fund,
the more likely the fund is to receive future flows. The effect does not correspond to better Star Ratings.
15.96
-0.44
9.60
-0.11
16.18
0.78
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Flows Model Star Rating Model
Equity Fixed Income Allocation
11
Category
New funds have a hard time attracting assets in a monopolistic category. Funds from the largest firms in the
category or asset class have easier time attracting assets.
12
-1.70
25.82
-18.59
-10.10
-24.74
30.12
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
Flows Model - Market Concentration Flows Model - Firm's Market Share
Equity Fixed Income Allocation
Firm’s Asset Weighted Manager Tenure
Keeping managers at a firm is good for flows but not necessarily for future Star Ratings.
5.18
-0.79
9.49
0.02
1.68
0.19
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Flows Model Star Rating Model
Equity Fixed Income Allocation
13
Risk Model Style Factors
Investors show preference for funds holding popular, moaty, large cap, overvalued stocks who have performed well
recently while higher Star Ratings are correlated with the opposite style tilts.
-3.26
-5.43
3.65
-0.06
-1.39
-0.50
-0.14
-2.29
-1.11
2.12
-0.61 -0.37
-1.15
6.57
-1.30
4.24
-5.81
-3.29
5.82
0.91
-0.90
3.73
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
Value-Growth Fair Value Economic
Moat
Valuation
Certainty
Financial
Health
Ownership
Risk
Ownership
Popularity
Size Liquidity Momentum Volatility
Flows Model Star Rating Model
14
Economic
Historically, launching funds in volatile times have led to higher future flows and Star Ratings. Increasing oil prices
is has had no effect on flows but has hurt Star Ratings.
0.02
0.00
0.93
-0.18
0.06
-0.01
0.19
-0.01
-0.06
0.01
0.52
-0.09
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
Flows Model - VIX 90 Day Moving
Average
Flows Model - 3 Mo Oil Price Change Star Rating Model - VIX 90 Day
Moving Average
Star Rating Model - 3 Mo Oil Price
Change
Equity Fixed Income Allocation
15
Summary
g Fund
gHigh fees hurt flows and Star Ratings
gMorningstar coverage has an economically meaningful impact on flows and Star Ratings
gManager
g Investors reward portfolio managers who own their fund and have their CFA; Star Ratings follow accordingly.
g Female portfolio managers attract additional flows
g Portfolio
g Increased portfolio disclosure correlates to higher flows and higher Star Ratings
gStyle
g Investor preferences are misaligned with the risk profile characteristics that led to higher Star Ratings
16
Summary
g Firm
g Investors have a preference for firms with high manager tenure at the expense of higher Star Ratings
gCompetition among new funds at the same firm hurts future flows
gCategory
g Funds launched in monopolistic categories are less likely to attract assets
g Funds from firms with large market shares accumulate more assets
g Economic
gVolatile times and decreasing oil prices correspond to higher Star Ratings
17
18
Disclosure
©2016 Morningstar, Inc. All rights reserved. These materials are for information and/or illustrative
purposes only. Not for public distribution. The Morningstar name and logo are registered marks of
Morningstar, Inc. The information contained in this presentation is the proprietary material of
Morningstar, Inc. Reproduction, transcription or other use by any means, in whole or in part, without
the prior written consent of Morningstar, Inc. is prohibited.
ADVANCING THE FUTURE OF INVESTMENT ADVISORY SOLUTIONS 2
Upcoming MMI Events
2016 Fall Solutions Conference October 18-19, 2016 | Boston The Westin Copley Place
Emerging Asset Managers Forum October 4-5, 2016 | New York The Yale Club
Toronto Wealth Management Summit November 15, 2016 | Toronto St. Andrew’s Club & Conference Centre
2017 Sales & Marketing Leadership Summit March 21-22, 2017 | Palm Beach, FL Eau Palm Beach
ADVANCING THE FUTURE OF INVESTMENT ADVISORY SOLUTIONS 1
NetMeeting -‐ Wednesday, September 14, 2016 at 12:00 PM Eastern Time
The Rise and Fall of New Funds: Why Some Succeed and Others Don’t
Introduc)on: Arlen Oransky, SVP, Chief Membership and Programs Officer, MMI Presenters: Lee Davidson, Head of Quan=ta=ve Research, Morningstar Madison Sargis, Quan=ta=ve Analyst, Morningstar Dura)on: 50 minutes (including =me allocated for Q&A). Note: This NetMee=ng is closed to members of the media.