Takeaways from Morningstar Adviser Forum

By Ravi Samalad |  27-11-19 | 
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About the Author
Ravi Samalad is Assistant Manager - Editoral for Morningstar.in.

It was a day of learning and networking for advisers at the Morningstar Adviser Forum held in Pune yesterday. A highly attentive gathering of advisers walked away with some fresh insights from our manager research and behavioral insights team.

Morningstar’s manager research analyst Kavitha Krishnan talked about how Morningstar rates funds and how advisers can pick winning funds.

Kavitha spoke about the most common mistakes investors tend to make while investing. For instance, investors often tend to choose funds by looking at the recent short-term performance without realizing how these returns were generated.

Shuffling funds for chasing high performers, redeeming during bearish markets and reacting to noise are some of the other fallacies’ investors exhibit. Having a diversified portfolio, staying the course by embracing volatility and choosing funds by looking under the hood are the tenets of successful investing.

Why is diversification important? Over a ten-year period (2009-18), Morningstar’s study showed that six out of ten times non-equity assets have been the best performers. So investing in debt provides a cushion to investors portfolio during volatile times.

Further, our study showed that during a 10-year period from July 2009 to June 2019, Indian stocks owed all their outperformance to just eight months, or 6.7% of all months. The same test was performed against Indian actively managed diversified equity funds to determine if the phenomenon applied to them as well.  We found that on an average, actively managed diversified equity funds outperformed their benchmarks for only eight months. “If your clients had not stayed invested during this eight-month period, they would not have made any money. This shows that timing the market doesn’t work, and investors should stay the course,” said Kavitha.

Shwetabh Sameer and Sarwari Das from Morningtar’s behavioral insights team took advisers through some of the most common biases investors face and how they can help overcome them.

In investing, past experience is a good guide for many investors. For instance, if someone had invested in an equity fund and not made any money for two years, chances are that investor may never invest in mutual funds in future.

Often, investors tend to ‘follow the herd’ or replicate others behavior. For instance, you are most likely to visit a food outlet which has a queue of customers waiting for a table. Similarly, investors tend to follow the most popular investment theme or idea when most people are talking about it. Off late, bitcoin is creating a lot of curiosity among people.

For consumer discretionary products/services like cars, clothes or eating a luxury restaurant, people tend to equate high price with good quality. But the same cannot be said for investing. In investing, stocks which are trading at higher than their intrinsic value can move towards their fair value over time. So buying low is the key.

Investors tend to often face a bias known as ‘hot hand fallacy’. Imagine cricketer M S Dhoni hit two consecutive boundaries. Many of his fans would anticipate that he will hit a hat trick. Not many would think that he may get out. Similarly, investments which are generating consistently high returns for some time can lure investors. In this quest, investors would often end up paying a premium to invest in such products by overlooking their risk appetite.

Another fallacy which investors face is ‘Choice Paralysis’. If investors have a plethora of options to choose from, they might simply fail to act or quit. They might invest in product which is grabbing the headline. Or they might just divide their investments equally in four different products. These were among the many biases which most investors tend to face.

Learning more about these biases and how you can help clients overcome them can go a long way in your success. For instance, advisers need to help their clients understand that staying calm in a market downturn or following the practices of renowned investors rather than their neighbors will hold them in good stead.

Besides, advisers also learned how Morningstar Adviser Workstation could help them enhance their research capabilities and grow their business grow.

Another trend among advisers is outsourcing investment management or portfolio construction activities. As advisers don many hats, Vishweshwarayya K from the Morningstar Investment Management team highlighted that it is important for advisers to focus on their core competencies like business development and cultivating client relationships by outsourcing investment management.

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