They’re STILL LYING TO YOU!!
i must give credit where due, hats off to Corey Hoffstein, @choffstein, for discussing this new whitepaper that CLEARLY shows the typical Wall Street Big Guys deliberately “gaming the system” RATHER THAN PROVIDING SOLUTIONS WITH VALUE!!
A paper published in October 2024 by Lauren Cohen of Harvard University and the Harvard Business School, David Kim and Eric So, both of MIT and the Sloan School of Management, Box Jumping: Portfolio Recompositions to Achieve Higher Morningstar Ratings ∗
Abstract
[They] show a novel mechanism by which mutual fund managers strategically alter their portfolios to take advantage of investors’ reliance on Morningstar star ratings. Specifically, funds achieve higher ratings by changing their holdings to induce Morningstar to reclassify them into size/value style boxes with lower average performance, thereby enabling more favorable peer comparison.
This practice, which we term ‘box jumping’, attracts fund flows and higher fees, despite sacrificing return performance and the ratings upgrades reversing within three years on average.
These patterns emerge after 2002 when Morningstar ratings began to be based on relative performance within style boxes, and are predictably absent beforehand.
Together, our findings highlight portfolio recomposition as a novel and strategic lever that funds use to manipulate Morningstar ratings, and that funds box jump despite compromising returns due to investors’ fixation on ratings when allocating capital.
NOW WHY WOULD SOMEONE DO SUCH THINGS?????
THE STUDY CLEARLY ILLUSTRATES “… a novel mechanism by which mutual fund managers strategically alter their portfolios to take advantage of investors’ reliance on Morningstar star ratings, generating higher fund flows and allowing them to charge higher fees.
Namely, … we illustrate how funds strategically modify their portfolios to prompt a reclassification into different size/value style boxes that are less competitive, and in which their performance record will rank them higher– resulting in a ratings upgrade.
This strategic reallocation and resulting upgrade lead to significant capital inflows due to the comparative nature of Morningstar’s rating system within specific style boxes, along with the opportunity to charge significantly higher fees.
However, the trades made in order to prompt the re-classification
result in future underperformance,
and the funds more broadly underperform in the future
in their new non-native style box.
Together, our findings reveal how funds use portfolio recomposition as a novel strategy to manipulate Morningstar ratings, and that funds box jump
DESPITE TRADING OFF HIGHER RATINGS FOR FUTURE LOWER RETURNS,
given investors focus on ratings when allocating capital.
And of course, when they serve up a real life example of this nonsense, guess who’s their guinea pig???
“To illustrate, … consider the case of Goldman Sachs U.S. Equity ESG A (ticker: GAGVX).
This fund was categorized as a Large Growth fund from December 2012 until May 2021, when it box jumped to the Large Blend category (refer to Appendix B for visual illustrations).
Despite a slight decline in its three-year trailing returns– from 14.5% in April 2021 to 14.2% in May 2021– the fund’s three-year Morningstar rating increased from three stars to five stars due to its new comparison group, which had worse historical returns.
Following the rating upgrade, the fund experienced significant benefits. Notably, it shifted from experiencing outflows to inflows, receiving approximately 1% of inflow per month in the six months after the box jump, compared to monthly outflows of-0.4% in the preceding six months.
Additionally, the fund raised management fees by 150 basis points after the jump."
SHAME ON YOU MORNINGSTAR,
UNFORTUNATELY, WE ALL EXPECT THIS FROM GOLDMAN SACHS!
YOU GOTTA APPRECIATE THEIR BRAZEN MONEY GRAB!!!
So there you have it, EVEN MORE PROOF THAT WALL STREET IS NOT TRYING TO HELP YOU - THEY’RE JUST TRYING TO FLEECE YOU BECAUSE YOU DON’T UNDERSTAND THE GAME!!
Stop PLAYING THE WALL STREET GAME.
LET US SHOW YOU HOW!!