Standard & Poors is Wasting Its Time And Yours

Standard & Poors was just on the network to talk about its new mutual fund rating service. Instead of just relying on past performance like other fund raters (like Morningstar) S&P will look under the hood to assess a mutual funds’ holdings according to Todd Rosenbluth, the S&P analyst who appeared on CNBC.

The new S&P service will be a combo of past results plus their ratings on the stocks held. He gave an example asking whether a fund owns AT&T or Qwest, it makes a difference and is important to know.

Rosenbluth is correct, it is important to know. Unfortunately there is no way to know what a fund owns now. Funds these days report holdings quarterly, some still semi-annually. IBM may have been the largest holding in a fund when it reported but the stock could be gone by now. The only way to know would be if your fund manager had been interviewed and disclosed such a move. Even then you would not be getting a look at the holdings, just selective disclosure in the context of the interview.

The bottom line is that there is no reliable way to know what an actively managed fund owns to today. More importantly there is no way to know what a fund will own in the future; what will your manager be thinking six months from now? This is not knowable.

That does not make actively managed funds bad per se but this is a big flaw, there is no way to do forward looking analysis on an actively managed fund. Picking an actively managed fund boils down to a leap of faith that the manager will continue to do a good job.

A good example might be the CGM Focus Fund (CGMFX). In 2007 it wildly outperformed the S&P 500. In the second half of 2008 it lagged badly and appears to be lagging YTD. How do you do a forward looking analysis based on that? You can conclude that the fund takes a lot of risks and has a good shot of outperforming in a flat to up market but that those traits tend not to work as well in a bear market and I’m not sure why it has lagged the rally that started in March. This is not analysis but a fairly obvious observation.