Parallels Drawn Between Directors, Soviets
May 15, 2000
John Rekenthaler, research director of Morningstar of Chicago, has been an observer and occasional critic of mutual fund industry practices in his online columns for the fund tracking firm at Morningstar.com. Rekenthaler, who will speak on investment advice at the Investment Company Institute's general membership meeting this week in Washington, D.C., discussed fund industry issues with Mutual Fund Market News reporter Mike Garrity. An edited account follows.
MFMN: Do you think funds are becoming passe?
Rekenthaler: No. I don't think funds are becoming passe. It's clear that funds are no longer chic. In the early 1990s, funds were the hot new thing. Of course mutual funds weren't new, but they were new to the mainstream populance in the late 80s and early 90s. They hit the big time. There was a thrill factor associated with mutual funds a decade ago.
I know this because I worked at Morningstar then. When I met people they said, "Morningstar. Mutual funds." Their eyes would light up. They wanted to get advice on what mutual funds to buy. There was a buzz about the industry.
Now, when I meet people, I say Morningstar and they say, "Oh Morningstar, mutual funds, huh." They think for a little bit and shrug and move on. If they thought I could help them pick an Internet stock or a technology stock, they'd be all over me.
Funds have gone from being perceived as the hot and sexy way to make a lot of money to being reliable and dull, responsible places to put your money. It's not all a bad thing, the image that funds have settled into. Reliability is a great attribute. People are putting a lot of money into funds. But it's what you do in your 401k plan and sort of forget about as opposed to what you're actively involved in, what might really make you rich.
MFMN: Is asset allocation a thing of the past?
Rekenthaler: No. I don't see asset allocation as a thing of the past. I do see the days of magic asset allocation prescriptions as a thing of the past. There have been segments in the financial advisory community that have featured allocation programs that purport to show that an investor needs to be four percent in this asset class and seven percent in this asset class and that if you're off by two percentage points, it all falls apart. Those programs purport to show a degree of accuracy and precision that just is not possible.
A lot of those asset allocation programs tended to put people into fringe asset classes like emerging markets, real estate investment trusts, energy, commodities, et cetera and they performed poorly. That was a fad of the 90s that is over. I don't think you will see these programs making a science out of asset allocation.
But the practice of diversifying between different assets, no, I don't think that's over. It has been wounded a little bit in the late 90s because, in substance, you got richer the more you ignored asset allocation. That was an accident of the times. It won't always be the case.
So I think asset allocation will stay around. It got oversold and the markets were unfriendly to the concept. But it hasn't disappeared nor will it disappear.
MFMN: If investment advice is an art rather than a science, does that present a problem for investment advice online?
Rekenthaler: Investment advice online is capable of no more or no less accuracy than face-to-face investment advice. Both online investment advice and face-to-face investment advice are hampered by the fact that the markets are surrounded with uncertainty. If we knew for certain that stocks would return 11 percent per year over the next 15 years with a specified amount of volatility, investing would be a mathematical exercise.
However, we don't know that. We can make estimates about what will occur in the financial markets but we don't know. So there is an enormous amount of uncertainty that makes any financial planning a complex affair, one that shouldn't be delivered in a way that the user thinks there are guarantees. That problem would occur either with online or in-person advice.
To me, the challenge for online advice is the communication challenge. When you're sitting with someone face to face, there is a lot of information and knowledge that is imparted by expression and non-verbal communication. In addition, it's a lot easier to have a true two-way conversation with a person as opposed to a program. An advisor gets a chance to communicate the notions of uncertainty. There is a tremendous amount of valuable teaching and learning that occurs in these conversations.