Editor's note: Morningstar FundInvestor turns 25 this month. We sat down with current and former editors and publishers, including Russ Kinnel, Christine Benz, Don Phillips, and Susan Dziubinski, to discuss what has changed since the newsletter first appeared and what the future could hold for investors.
Don Phillips: To me the biggest change in the last 25 years is that the fund industry has fundamentally changed. Twenty-five years ago, mutual funds were sold, not bought. The people that led that industry were those that had the biggest sales force, so the big wire houses and places like that that just dominated the flows in the industry. What it meant is that sort of the quality of the funds took a second seat. The key thing was what was easy to sell. You had funds competing--what could have the highest yield, without thinking about the consequences of stretching for yield.
Russ Kinnel: The industry is more transparent. Costs are lower. I think maybe most important of all, I think a lot of the weaker players have been weeded out and the money is concentrated in some of the best stewards, some of the best managers, both active and passive.
Christine Benz: I remember when I started at Morningstar in 1990s, we focused so much on who was in charge. Was Bob Stansky in charge of Fidelity Magellan? Who might be in there next? We watched the comings and goings of managers very closely.
Susan Dziubinski: Today's investor is more likely to have more of his or her assets invested in passive strategies. Now, index funds were certainly around 25 years ago, but the investors back then were more interested in star managers who were practicing stock-picking strategies that were different from the market. For instance, back then, an actively managed fund, Fidelity Magellan, was the largest fund. What's the largest fund today? An index fund--Vanguard Total Stock Market.
Benz: In the past, many investors were inclined to just gun for the fund with the highest returns. But I think the experience of two big bear markets in the space of 20 years got all investors attuned to the role of managing risks in their portfolio, that they didn't want to just glom onto the funds that had generated the highest returns, they wanted to take a look at what sorts of risky behavior may have been going on in the portfolio to generate those returns.
Kinnel: Over the time I've been at FundInvestor, I think our central mission has really been the same, serving investors, helping them make good decisions. I think one of the things that's changed a little is, investors are maybe a little more interested in their existing portfolios. So, don't just give me new ideas, but give me something about the funds I own; help me to invest for the long term.
Phillips: FundInvestor really helped arm investors. I mean, if you look at FundInvestor, there's so much amazing information in that. I mean, one thing, it narrows down the universe from thousands of funds, a lot of which are relatively low quality, to 500 quality funds, and then it gives you a wealth of information about them. It really makes you an informed purchaser. To me, that was the real catalyst to the sea change. As investors got armed with more information, they were able to make better decisions. As investors made better decisions, flows started going to the better funds. As flows started going to the better funds, it forced the weaker funds to emulate the behavior of the better-behaved players. All of that led to this maturation of the industry and a real power shift from those people that had sales muscle to those people and those funds that really had investment merit.
Kinnel: One of the real tectonic shifts in the industry has been costs. Costs have been coming down significantly for the average investor, and I think that's really going to continue. Most of the change has been on the index front, but I think active is waking up to the challenge and realizing that if you want to compete with an index fund that charges maybe 10 basis points, you want to charge, let's say, 70 or 80 basis points. You have a much better chance of success than the fund that's charging 120 basis points.
Dziubinski: A challenge for the fund industry in the next 25 years will be helping investors with the drawdown phase of their investment lives, particularly as the baby boomers edge into retirement. We spend a lifetime building our nest eggs. Effectively spending down those next eggs is a different matter entirely.
Benz: One thing that I don't expect to change in the years ahead is gimmickry, is the predilection of fund shops to hit the market with products that are kind of ripped from the headlines. The margins are just too high in the asset management industry for firms to step away from this sort of activity altogether. And that's where I think Morningstar FundInvestor and Morningstar in general will continue to serve a really valuable role, to take a hard look at some of these trends and tell investors when we do think a fund type or an investment type is just a gimmick and probably something that is not going to serve them well over the long haul.
Phillips: I think it's a good time for investors. I kind of look at the fund industry and sort of liken it to California wines, the California wine industry. If you went back 30 years ago, there was a lot of really bad wine in California. But as the standards improved across the industry--Cal Davis had this wonderful program helping people understand the science behind winemaking--the standards went up and the overall quality of wine went up. And today, it's pretty hard to buy a flawed bottle of wine from a major California producer. You might like some more than others, but to get a really bad wine is very, very rare. And increasingly, the same thing is true in the fund industry. The overall standards, the fiduciary behavior of fund companies has improved. A lot of that comes from things like FundInvestor that shine a light on best practices in the industry. I think, it's a good time for investors. Maybe the superstar funds stand out less because you don't have as many really terrible funds as there were 25 years ago. The overall quality has gone up. But it means if you are an investor, that's a good thing. There are lots and lots of good choices out there, and FundInvestor can still help you find the ones that are exactly right for your portfolio and your needs.