Around every corner, there’s someone with an investment recommendation. How do you evaluate them? That’s a topic that I’ve written hundreds of postings about, so it can’t be laid out in full in this one, but here are some thoughts.
The ideas shown above are featured as “four picks for the present” in the latest edition of MorningstarAdvisor. (Sharp readers will notice that there’s only three investments illustrated; I left out a separate account for which I didn’t have returns.)
A good place to start is with the source of the recommendations, in this case Morningstar. What do you know of its methodologies, motivations, expertise, and track record for each of these different kinds of investments? Then, who is in the target audience? Here, advisors. How does that affect the kinds of ideas offered and the way in which they are presented?
You need a plan of attack for analysis. Are you going to be doing due diligence from a distance or up close and personal? That frames everything else.
Of course, the last thing you should be doing is basing your decisions on past performance, but deconstructing it — even the few months in the chart — can provide important clues about the future. The top panel shows the absolute returns and the bottom one a measure of relative returns. As explained below, a different index for comparison is used for each.
The stock of Charles Schwab (SCHW) is the best known of the three. It’s a great example of understanding the “who”: Morningstar has business relationships with Schwab and a great many advisors do too. I’m not saying that there are conflicts of interest, but you’d better think about whether there are or not. To measure SCHW in a relative sense, I compared it to the financial sector ETF (XLF).
Look at the relative performance of Artisan Global Value (ARTGX). It has a consistency that gatekeepers love. But what’s the right benchmark? I used the MSCI All Country World Index. Interestingly, the fund name says “value,” but it appears as “large growth” in the Morningstar style box. Hmmm — what comparisons should be made?
The most recent entrant here is a Barclays ETN (VQT), which is shown versus the S&P 500, since its mission is to beat that index with less risk. That sounds great, but it’s an ETN with a methodology related to volatility, moving among the S&P, VIX, and cash. Time will tell whether the ETN can deliver as is intended, whether investors really understand it, and whether the issuer comes out best off in the end.
Are these “picks” good ones for you? How do you go about deciding? (Chart: Bloomberg terminal.)