Morningstar Runs the Numbers

Inspired by Harper's Index (with a tip of the hat to FiveThirtyEight's Significant Digits blog), Morningstar Runs the Numbers uses a numbers-based approach to highlight recent Morningstar research, along with some outside news stories.

$3,822 John Rekenthaler examined the cost borne to the small investor of buying and holding T shares, a lower-cost alternative to A shares. (The maximum sales load on an T share is 2.5%, with a 0.25% per year 12b-1 fee.) He found that in some cases, buying and holding T shares can be less expensive than buying no-load funds and paying a 1% advisory fee:

"Within four years, if the T shares are not sold, they will be the better-performing of the two options. The math only improves over time. Consider a fund that gains 6% with its institutional shares. Its T shares, carrying the 12b-1 fee, make 5.75%. A $50,000 initial investment that is held for 10 years becomes $85,267 via the T shares, as opposed to $81,445 in the advisory account."

4% Manager research analysts Jason Kephart and Cara Esser examined the shrinking income levels of taxable-bond CEFs, which posted 2016 distribution levels that were down 4% from their 2015 amounts--double the year-over-year change from 2014 to 2015. In this article, they examine the taxable-bond CEF asset class, as well as tools investors can use to assess a CEF's distribution:

"On a category level, high-yield—the largest taxable-bond CEF category—saw its distributions fall the most. The average and median distribution changes for high-yield CEFs were negative 7% and negative 6% lower, respectively, than in 2015. On the face of it, this might be surprising, given that high-yield was 2016's best-performing fixed-income sector. But it is important to keep in mind that the factors which contribute to a fund's distribution make up only a portion of those which feed into its return."

0.3% to 4.5% In a blog post, Meb Faber examined dividend stock investing through an aftertax lens. He concluded that dividend yield investing is rooted in value investing; however, focusing on dividend yields rather than value has historically been a suboptimal way to express value. Further, high dividends were only ideal in a tax-exempt account:

"Once you have a preferred value methodology, AVOIDING dividend stocks in the strategy could result in additional post tax alpha of approximately 0.3% to 4.5% for taxable investors."

9 percentage points Director of global ETF research Ben Johnson examined the performance of various factors over the past nine years as well as in 2016 in particular. His conclusion: Factors are fickle as ever. In fact, 2016 saw some dramatic changes in factor leadership:

"VTV has lagged VUG for over a decade … but value made a comeback in 2016. For the year through Nov. 30, VTV outperformed VUG by nearly 9 percentage points. This wasn't magic, but classic value investing in action. The largest contributors to VTV's performance through the first 11 months of the year were stocks in the GICS financials, industrials, and energy sectors. These stocks entered 2016 battered and bruised and took some additional lumps early in the year. Fast-forward to the end of November, and these three sectors were the best performers within the S&P 500. At the risk of stating the obvious, value works best when there are values in the market."

17 There's a lot of uncertainty facing investors these days. As director of manager research Russ Kinnel discusses, given the cyclical nature of markets, the chances for a bear market grow higher after an extended rally. Plus, there are signs that inflation is on the rise, and the Federal Reserve raised rates in December and signaled it expects to raise them three more times in 2017. Kinnel says the best response to uncertainty is diversification, and he offers 17 fund ideas to help investors diversify their portfolios.

106 Small-business owners seem to be increasingly optimistic about a Trump administration and what that means for the business landscape. The National Federation of Independent Business' Index of Small Business Optimism jumped to 105.8 in December, an increase of 7.4 points, and its highest level since 2004. Director of economic analysis Bob Johnson thinks a close examination of the underlying numbers in the report shows that there might be more sentiment than reality at play, however:

"The numbers don't necessarily look radically changed. I think it's a lot of things. How do things look in a few months from now? Is it a good time to start a business? Those types of questions that are more touchy-feely did particularly well. The one part of the report that we do like to look at, despite statistical issues with the general report, is the number of people saying that it's hard to fill positions. That number actually ticked down a little bit. I mean, not badly, not indicating any big problem. But certainly, it wasn't one of the big driving forces that popped the number to 106. So, clearly, even here we've got to be a little careful that people are optimistic about what [Trump] will do, but right now, what they are seeing isn't necessarily quite as great as this number might indicate."

13 In celebration of Friday the 13th, Mental Floss put together a list of "13 Reasons People Think the Number 13 is Unlucky."

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