Seth Klarman’s 2021 Letter: Baupost’s “Never-Ending” Hunt For Information
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
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Overwhelming academic evidence documents the difficulty in distinguishing skill from luck among actively managed mutual funds. Despite this fact, many vendors have attempted to identify those that will beat their benchmarks and deliver excess risk-adjusted returns. Noteworthy among those vendors is Morningstar, which offers forward-looking “analyst ratings.” We’ve evaluated the predictive ability of the first vintage of those ratings, which were published three years ago.
Our results affirm the academic research; it’s really tough to pick a winning mutual fund.
Morningstar’s methodology is documented here. The analyst rating reflects the “conviction in the fund’s ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term.” Morningstar issues five ratings: gold (the highest), silver, bronze, neutral and negative (the lowest).
The first vintage of ratings, encompassing the 339 funds, is shown here and were the basis for our analysis. Our methodology and results are explained below.
The results of our study
Below is a summary of the 338 funds that survived for the three-year period, along with their analyst ratings and percentage distribution of those ratings:
Number of Funds
To create a baseline for our analysis, we divided the 338 funds into five groups based on their expense ratios2. These ranged from the 149 funds with the lowest expense ratios to the six funds with the highest expense ratios.
Michael Edesess and Marianne Brunet assisted in the research for this article.
We did not have access to the expense ratios at the beginning of the period, so we used the expense ratios at the end of the period. Since expense ratios do not change dramatically, we believe this did not have a significant impact on our analysis.