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Wednesday, March 19, 2014

Do Investors Grok Jumping the Style Box?

News summary by MFWire's editors

Everybody nowadays loves to be seen as somebody who thinks out of the box. So cool, so innovative, so hipstery.

Blurring the lines on investment style-boxes has always represented a special kind of pain in the neck for fundsters and their retail investors. On the one hand, messing with the boxes can give PMs more freedom. Going into wacky new categories often gives firms a new puddle to dominate in terms of performance.

But playing hoochie coochie with the boxes often drives investors and analysts bananas. If a particular fund has a little of this, a little of that and a smidgen of a third category, how are you supposed to make sense of the things?

Well, maybe investors are starting to grok this blurring of the lines, according to a Morningstar column by senior fund analyst Gregg Wolper.

Here is one quote from Wolper on the possible benefits:
Although investors should be wary of new fund types -- many trendy but unwise fund ideas have come and gone over the years -- some of these rest on a reasonable footing.
Investors get it, that some boxes can do with some stretching. Wolper provides the examples of an emerging market fund also including securities from developed market companies that do a lot of business in emerging market countries. Ditto for blurring lines between emerging and frontier markets: yesterday's frontier market is today's emerging market and tomorrow's staid, established incumbent.

By reading Wolper's article, you get the sense that investors are willing to be open-minded when it comes to box blurring, as long as the arguments are solid.

There is actually a growing movement among alts firms to evolve Morningstar's approach with new categories and definitions. Some alts folk want a complete make-over on how analysts look at the products.

But don't push it. Investors who have been around the block already know that many of these frou frou funds end up as flashes in the pan. Also, the investing thinking process is hard enough as it is, so people are only going to accept so much extra work before they start to tune you out.
Of course, no one would suggest that fund companies stop introducing new concepts. Some new fund varieties--probably a distinct minority, but some--will prove to be useful additions. Unfortunately, the proliferation of fund types can lead to more work for investors and advisors. Even those who choose the indexing route will find an incredible array of choices awaits them.
Remember, blur carefully. 

Edited by: Ning Zhou

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