Author Topic: Morningstar vs. advisor  (Read 1666 times)

firescape

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Morningstar vs. advisor
« on: June 01, 2017, 08:00:21 PM »
My advisor says he's beaten the S&P 500 returns for 12 years and sends me charts showing exactly that. So I went to morningstar.com and compared the same funds I have with advisor to VTSAX and VFIAX over  the same time period. All funds start with a hypothetical $10,000 investment and (as I understand it) show actual past returns. The results show the ending value of accounts as this;

VTSAX:$24,510.61
VFIAX:$24,234.35
:GFACX:$21,519.25
GFAFX:$23,528.67

The other thing I noticed (I'm pretty sure, but not certain), is that expense ratios and loads are not accounted for in the results. The beginning value on all 4 funds shows $10,000.
But GFACX has an expense ratio of 1.46% and back end load of 1%. And GFAFX has an expense ratio of .71%, no front or back end load.
Obviously if the expenses are factored in the results are really lopsided towards Vanguard.

I'm missing something here, or either advisor or Morningstar does not have accurate information.
Are the expenses on the American Funds already in there somewhere?
Would the fact that I didn't start with a hypothetical $10,000 investment (like the simulation), but instead regularly invested small amounts of money, have some magical ability to make the American funds outperform index funds, like advisor claims? Lol.

Please let me know what you think, thanks.

« Last Edit: June 01, 2017, 08:13:28 PM by evaporator »

Sparks11

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Re: Morningstar vs. advisor
« Reply #1 on: June 01, 2017, 10:50:32 PM »
Expense ratios are essentially reflected in long-term returns, as they essentially lower the potential return for the investor. Load fees are not usually reflected in charts, particularly in any that American Funds would present to you.

Additionally, 10 years is not a long enough period to judge the performance of a fund. I'd look for 20-plus years.

Ultimately, however, there are two golden rules you should keep in mind: (1) Actively managed funds almost always underperform the market over the long haul; and (2) load fees absolutely kill long-term returns. This is why you want a fund with no load fee at all, as well as one with a low expense ratio. I'd highly recommend the Vanguard S&P 500 index fund, or one like it.

Put simply, I'd trust Morningstar over an Advisor any day of the week, especially in your case. Typically an advisor selling American Funds gets paid a nice commission on every deposit you make. Your dollar cost averaging creates a nice annuity for them, whether you beat the market or not. Morningstar is an objective service and its known to have the best information on mutual funds.

firescape

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Re: Morningstar vs. advisor
« Reply #2 on: June 02, 2017, 11:16:30 AM »
Thanks Sparks11 for the reply. I agree with fees killing the long term returns, and have started to move investments over to Vanguard because of this.
What I'm really after is how to compare 2 funds while taking into account the true cost of the fund; front loads, exp. ratio etc. I'll be damned if I can find a concrete answer to this. I've posted about this before without luck.
I'm convinced Morningstar does not account for fees in the comparison I showed, so the American funds performed worse than the results indicate. But by how much is anybody's guess.
Hasn't somebody come up with a comparison calculator that shows the historical performance of various funds while taking into account what they actually cost the investor?
It still seems crazy to me that I can't find a way to truly compare 2 or more funds.

Sparks11

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Re: Morningstar vs. advisor
« Reply #3 on: June 02, 2017, 11:26:30 AM »
No problem. Your right that Morningstar doesn't account for load fees. However, since expense ratios are a normal operating expense for the fund, they are reflected in returns over the long haul. To calculate the difference with a load fee, I would use a financial calculator to get an estimate. I'd find the compound average return for a period, then subtract the load fee from that compound average return to find the real return.

Then you can run two scenarios: One with $10,000 over X period at the rate without the load fee, then one with $10,000 over X period at the rate with the load fee. The difference will be a great chasm, probably to the tune of hundreds of thousands of dollars if your talking decades.

MDM

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Re: Morningstar vs. advisor
« Reply #4 on: June 02, 2017, 08:43:53 PM »
I've posted about this before without luck.
What was unlucky about
"Morningstar's "growth of $10K" does account for expense ratios.
It does not account for a front end (or back end) sales charge (aka load).
See Morningstar Data Definitions for more."? :)

The expense ratio effect is the difficult one, and Morningstar does that for you.  To account for front or back end loads, multiply the Morningstar result by (1 - load).

firescape

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Re: Morningstar vs. advisor
« Reply #5 on: June 03, 2017, 12:47:57 PM »
Ok thanks Sparks and MDM for the clarification.
MDM, I guess I wasn't unlucky. For the life of my I couldn't locate that older thread, and had other information to the contrary about Morningstar. Perhaps I'm obsessing, but really determined to get my brained wrapped around this once and for all.

I've moved all my EJ investments over to Vanguard and am looking to move the remaining AF held at MS over too.
I showed MS advisor the Morningstar results (where index funds outperform my AF over same time period) and asked if he could explain why his charts show the opposite, the same American Funds outperforming the index by about 1.5% net of fees.
He suggested it could be due to dollar cost averaging, and that he wasn't sure.




MDM

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Re: Morningstar vs. advisor
« Reply #6 on: June 03, 2017, 12:55:54 PM »
He suggested it could be due to dollar cost averaging, and that he wasn't sure.
Must have been hard to hear over the noise of all his hand-waving. ;)