by Paul B Farrell, JD, PhD
Morningstar, Lipper, Moody‘s, Standard & Poor’s and other presumably “independent” investment data providers have huge conflicts of interests. One notable conflict that’s rarely discussed in public is the fact that these data-trackers often do contract market research for fund companies, helping them design, structure, deliver marketing programs and rate new securities that are target-marketed back at their own investors. Similarly with credit rating firms whose ratings should protect securities buyers. They are paid by the issuers and failed the buyers of trillions of so-called “triple-A” rated securitized mortgages during the 2008 meltdown.
Moreover, most of the information provided to these data trackers and the SEC by funds and corporations, is anywhere from three months to a year old. And since many funds turnover their entire portfolio holdings more than once a year, you really cannot be sure what they own today. And when it comes to bonds and collateralized debt obligations, the value of underlying collateral may be little more than a derivative of mathematical algorithms and personal guarantees. Another huge problem, their statistics look so beautifully rational and scientific (especially all the “Modern Portfolio Theory” measurements such as the Sharpe Ratio, Standard Deviation, alpha, beta and R-Squared) and yet, studies show that as fascinating as all the data-trackers numbers are to look at, they have virtually no predictive value—they are just cosmetic, window-dressing designed to perpetuate the illusion of rationality.
Mark Twain was right about “lies, damn lies and statistics.” So do you really believe all those sophisticated statistics generated by Morningstar, Standard & Poor’s and Lipper for The Wall Street Journal, Barron’s, Fortune, Kiplinger’s, DowJones MarketWatch and every other financial news sources will help you predict the future performance of a fund? No! And that’s the bottom line in a Financial Research Corporation (FRC) study, “Predicting Mutual Fund Performance II: After The Bear,” This study was prepared five years ago for sophisticated industry insiders, not your average Main Street investors, and given its intended audience. It is one of the most significant research studies available on the value of the statistics that are used by virtually every one of America’s 95 million investors. (More)