Let me ask you this. How do you know
that the data you’re relying on to make investment
decisions is accurate? OK, today we’re
talking about a paper. It was done by professors
Chen, Cohen and Gurun. And it looks at these things
called the US fixed income mutual funds. It’s just a pooled
investment into bonds. And what they’re
saying about it is that some of the information
intermediaries, i.e. the people that are giving
you data about what to buy aren’t reflecting
what’s accurately going on in those funds. So let me tell
you what they did. They looked at data
from Morningstar. And Morningstar is one of those
information intermediaries that gives you data on
this pool of investments. And they looked at what
Morningstar was using to rate the funds, which was
self-reported survey data. So in other words, a fund
says, yeah, you know, we have 100 per cent AAA bonds. And by the way, AAA is the
least risky kind of bond that there is. But what they found is
that, in reality, they went and looked at, okay,
what bonds are actually in that fund. And what they found
is that it may not be 100 per cent AAA bonds. They may have some AA, A, BBB. And they found
that this practice was happening across
a lot of funds, and it was pretty widespread. And it was strategic,
because if you’re a fund you want to look as
safe as possible, right, because that’s going
to attract more investor money to you. But if you say, you know, we
have some of these more risky B bonds in there,
you’re not going to be as attractive to investors. So this is a chart of the
actual data that they looked at. The red bars are the
Morningstar statistics. So they’re saying, yes, this
is the percentage of AAA that we have in aggregate. And this is the percentage of
B, and everything in between. But the blue bars are
actually the things that the researchers found
are in those underlying bond holdings. And as you can
see, if you go down this list, the safer
the bond, the less they found that there
were actually bonds in that category in the funds. And the more risky
it was, they found, actually, there’s
more of those in there than were being reported. Now, Morningstar, for its part,
they stand by their analysis. They say, we don’t
think that this is true. We stand by our
rating methodology. But if it is true, and you do go
look at these underlying brand holdings and find that
they’re riskier than they’re being reflected as in
these Morningstar ratings, that is bad. I don’t know really
how else to put it. That’s essentially
misleading an investor. And when somebody is putting
their money into something, you want them to have the full
information that they can have, because all
investments are risky. And it’s people’s
money at stake. And they deserve to know
what they’re putting it into. And so that’s why it’s really
important for every investor – and I want to stress this – to
understand what exactly you’re putting your money into. We got into trouble with
this in the financial crisis. And I think it happens a lot
more often than people think, which is that, you may have a
really reliable source telling you, here’s what’s in
this fund, but I really do think it’s important to
go look at the holdings. What exactly is this
money going into? And that will help investors to
make more informed decisions. So I just want to leave
you with this concept that, actually, self-reported data,
it’s not always reliable. And go and look at the
underlying holdings. And you’re going to have a
much better picture of what you’re putting your money into.

8 thoughts on “How to get accurate investing information | Charts that Count”

  1. Is morningstar free? Voluntary reporting sounds like a recipe for disaster, it's lile morningstar just collects all the product leaflets without actually checking the prpduct.

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