Brooke’s Note: The Wall Street Journal was once a great business-to-business publication. But in a digital age, as consumer-side readers’ clicks got easier to come by, WSJ’s coverage tilted. Now, its political reportage, for example, is excellent. But once in a while, the Journal takes a stab at showing it still has B-to-B street cred. It’s broadside over the Morningstar bow in “A Morningstar mirage” is one such example. Sure, the Journal makes some good points. But its attempted takedown of the giant researcher and its star-rating system suffers from a lack of fluency in talking business. The problems begin with its journalists’ seeming ignorance about the news. The star-ratings system’s shortcomings as presented in the paper are, I’d argue, well-argued but well-trampled ground. Second of all, the Journal does not seem to understand that the advisor world now tilts heavily to fee-based guidance. Its examples of star-rating abuse seem to go to brokers looking for a way to sell funds in a transactional environment. The third factor springs partially from each of the first two. In its thirsting for corporate profits, Dow Jones itself purchased a controversial ratings system from R.J. Shook several years ago, one that assigns rankings to human financial advisors. See: Getting inside Barron’s Top-100-Advisor lists with some help from Sterling Shea. Like the star ratings, its “top” ratings look exclusively into the rear-view mirror and derive giant revenues by turning around and selling those ratings back to the advisors themselves as marketing fodder. Morningstar did not raise that issue in rebutting the Journal but to me it seems too big an irony to ignore.
The Wall Street Journal got its jabs in during a rare bare-knuckle exchange with Morningstar Inc., but it’s the venerable Dow Jones publication that may end up seeing stars. See: Morningstar bristles about being ‘refused or ignored’ by DoubleLine as the ‘silly, ugly feud’ between Jeffrey Gundlach and the ratings firm rages on.
In this corner is the New York-based Journal, part of the Murdoch media empire that spans 120 newspapers in five countries and has the largest newspaper circulation in the United States.
Defending its title is Chicago-based Morningstar, an investment research and investment management firm that rates the $16-trillion mutual fund market sector and has more than 250,000 advisor subscriptions on its research platform. See: Morningstar renders ETF verdict by discontinuing ETF-only conferences after category becomes the Vanguard-BlackRock show.
Three bylines, one year
On Oct. 26 the Journal printed a front page investigative three-byline article with the provocative headline, “A Morningstar mirage: Investors everywhere think a five-star rating from Morningstar means a mutual fund will be a top performer—it doesn’t.” (The article first appeared on the WSJ.com website Oct. 25.)
“Millions of people trust Morningstar to help them decide where to put their money,” the Journal stated. “Funds that earned high star ratings attracted the vast majority of investor dollars. Most of them failed to perform.”
That said, the more than 4,000-word article by Kirsten Grind, Tom McGinty and Sarah Krouse pursued the angle that Morningstar’s Analyst Rating for Funds, rolled out six years ago as forward-looking ratings, are also counterproductive. See: Morningstar explains its new forward-looking rating system — and tosses in some hot fund picks for good measure.
The publication also strongly implied that Morningstar’s relationship with giants like J.P. Morgan Chase & Co. and BlackRock Inc. may not be wholly kosher. “[BlackRock] has a team that works to persuade Morningstar analysts of the merits of various funds, [and] BlackRock CEO Laurence Fink met with Morningstar analysts early this year to discuss the firm’s ratings. In May, Morningstar upgraded to positive BlackRock’s ‘parent pillar’
[analyst] rating.” See: BlackRock solicits more regulator scrutiny of robo-advisors, eliciting jeers and a cheer.
As the war of words rages on, research firms like New York-based CFRA hope to capitalize on the fallout and win business from Morningstar.
“Since the WSJ article we are hearing from many advisors that want either a second opinion or one that goes beyond a fund’s track record.” Said CFRA’s senior director of ETF and mutual fund research Todd Rosenbluth. “While more research has always been important we think the WSJ opened many eyes that were misunderstanding what they had. CFRA expects to continue to win business as we provide a more complete and forward-looking fund rating.” See: Bill Gross jumps back in the ‘total return’ game, first with a one-client, $100-million SMA, he tells P&I, but with a mutual fund on the way.