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Trustnet vs Morningstar Investment Trust Ratings
Chris Howland
Posted: 18 October 2017 22:18:36(UTC)
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Does anyone use Trustnet and/or Morningstar ratings?

I use both of these resources for research purposes, however the differences in the ratings given to various Investment Trusts I own leaves me puzzled. In an attempt to reconcile the apparent differences, I went back to the respective definitions:

FE Crown Rating

FE Crown Fund Ratings are quantitative ratings ranging from one to five designed to help investors identify funds which have displayed superior performance in terms of stockpicking, consistency and risk control.
A single FE Crown Fund Rating reflects the lowest tier, and suggests the fund has failed to impress on the above terms, while a five FE Crown Fund Rating reflects the highest tier and identifies a fund which we think is of superior quality.

Note - Three Crowns is therefore average (I think) and the evaluation is quantitative (and therefore follows pre-determined rules you would expect).


Morningstar Rating

The Morningstar Rating system is an objective mathematical evaluation of funds based on their past performance, which takes into account also their risk and sales load. A difference in risk and sales load can thus affect an investment rating.

Note - The scale is from one to five stars, with five being the best score. Objective and mathematical you might expect to be quantitative and rule driven... wouldn't you?


Looking at a few of the Trusts I hold:

City of London Trust (CTY) - Morningstar four stars Trustnet three crowns

Murray International (MYI) - Morningstar four stars Trustnet one crown

New City High Yield (NCYF) - Morningstar five stars Trustnet three crowns

These are evaluations based on actual rather than prospective performance, so a degree of consistency ought to be in order... The only degree of consistency I can find is that there are usually more Morningstar stars than Trustnet Crowns but this isn't always the case (e.g. NAIT).

I don't mind differences in analysts evaluations, but if the differences in analysis are contradictory (in the case of MYI, very good (Morningstar) versus a failure to impress (Trustnet)) then something is clearly amiss.

Does anyone have a view on Morningstar versus Trustnet ratings?

Chris
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King Lodos
Posted: 19 October 2017 00:06:13(UTC)
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There have been a few studies looking at Morningstar ratings .. This is from a Vanguard paper, and it actually found a negative correlation between fund ratings and future returns:

https://i.imgur.com/rf3WUdW.jpg

Unlike the more active hedge funds – that charge and churn a lot – most funds and ITs are fairly static plays on certain stocks or themes (to keep charges down and performance market-like .. in fact with ITs, it's much easier to get your outperformance from gearing than stock-picking).

So it's no wonder good 3-5 year performance usually means these stocks have been on everyone's radars, are fully valued, and are less likely to outperform .. The size of a fund (top funds usually attract more inflows) is a strong negative predictor on active management too .. Which doesn't make picking active funds very easy .. Academically, Value and Momentum are somewhat predictive (over periods from a few years to a single month), so my advice would be to find funds with strong momentum, low valuations, and preferably as small and off the radar as possible (I consider a 1 star rating a big plus when a fund fulfils those criteria) .. I've bought numerous 1-star funds that have gone on to top performance in the fund universe within the year
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Mickey
Posted: 19 October 2017 08:27:28(UTC)
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No surprise that a Vanguard paper should find fault with a rivals system :-)

The star and crown ratings are historical performance and thus not necessarily an indicator of future performance. Rather than use one system I would take cognisance of both plus also consider analyst ratings such as the Morningstar Gold Silver, Bronze system. There are also some broker forecasts such as those from Winterflood, Charles Cade etc.

An interesting play is to take a look at the John Baron portfolios and compare those against the various ratings systems. For example in the Growth portfolio he currently holds 2 IT's with no rating, 1 x 1 star, 2 x 2 stars, 5 x 3 stars, 9 x 4 stars and 5 x 5 stars.




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Keith Cobby
Posted: 19 October 2017 08:34:54(UTC)
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All very subjective and irrelevant. Fund Calibre have elite ratings and i hold some of those, so those must be the best!
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Mickey on 19/10/2017(UTC)
Betty G
Posted: 19 October 2017 08:43:12(UTC)
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. My personal experience is quite the opposite of Lodos. I've seen returns in excess of 300% in 6 years by backing highly rated ( consistent = momentum ) Trusts.

I posted the following a while back :


Posted: 24 August 2017 15:42:54
Hello Jan, I'll disclose my main portfolio of I.T.s to you and then you can research them with a view to personal suitability. I am recently retired but I haven't been tempted to adjusted these main core holdings as they are perpetual high octane growth trusts that outperform there sectors over most if not all timescales. They are also, coincidentally, all at least Trustnet 5 star, (you can check the criteria on their website), and Morningstar 5 crown. They also rate analyst gold in most cases. ( again, you can check the criteria to gain this status on their website).


Scottish Mortgage Trust.................10%
Bailie Gifford Shin Nippon..............10%
Fidelity China Special Situations....10%
Monks.............................................10%
TR European Growth......................10%
3I Group".........................................10%
Rights and Issues............................10%
Try....................................................5%
Independent Inv. tust.......................10%
4 medium term duration bonds
with financial institutions..................10%

I also hold one individual stock in
Rio Tinto...........................................5%
.........................................................................................................................................................................................



I am acutely aware that nothing works all of the time, but whilst it's working, don't lift the bonnet, as an old boyfriend used to say.





.

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Tim D
Posted: 19 October 2017 08:53:26(UTC)
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Mickey;52119 wrote:
No surprise that a Vanguard paper should find fault with a rivals system :-)


If you google things like "morningstar rating predictive power" you can find a ton of research concluding much the same thing. As a charges maven I'll take heart from Morningstar's own research which reluctantly concluded low cost had more predictive power than their own star rating!
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Mickey
Posted: 19 October 2017 09:59:13(UTC)
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Tim D;52127 wrote:
Mickey;52119 wrote:
No surprise that a Vanguard paper should find fault with a rivals system :-)


If you google things like "morningstar rating predictive power" you can find a ton of research concluding much the same thing. As a charges maven I'll take heart from Morningstar's own research which reluctantly concluded low cost had more predictive power than their own star rating!

I know, same thing with active vs passive :-)
King Lodos
Posted: 19 October 2017 12:27:30(UTC)
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Betty G;52123 wrote:
. My personal experience is quite the opposite of Lodos. I've seen returns in excess of 300% in 6 years by backing highly rated ( consistent = momentum ) Trusts.

I posted the following a while back :


Posted: 24 August 2017 15:42:54
Hello Jan, I'll disclose my main portfolio of I.T.s to you and then you can research them with a view to personal suitability. I am recently retired but I haven't been tempted to adjusted these main core holdings as they are perpetual high octane growth trusts that outperform there sectors over most if not all timescales. They are also, coincidentally, all at least Trustnet 5 star, (you can check the criteria on their website), and Morningstar 5 crown. They also rate analyst gold in most cases. ( again, you can check the criteria to gain this status on their website).


Scottish Mortgage Trust.................10%
Bailie Gifford Shin Nippon..............10%
Fidelity China Special Situations....10%
Monks.............................................10%
TR European Growth......................10%
3I Group".........................................10%
Rights and Issues............................10%
Try....................................................5%
Independent Inv. tust.......................10%
4 medium term duration bonds
with financial institutions..................10%

I also hold one individual stock in
Rio Tinto...........................................5%
.........................................................................................................................................................................................



I am acutely aware that nothing works all of the time, but whilst it's working, don't lift the bonnet, as an old boyfriend used to say.


Those are a lot of the same ITs (or fund equivalents) I'm in at the moment ... But I'd note things like Fidelity China, TR European Growth, etc. weren't the best things to be in prior to 2016.

I assume FCSS's rating would've been on the floor the first two years after launch – famously underperforming with Bolton (although I thought the criticism was far too premature) – and then of course steaming back over the past year or two.

Maybe there are historic ratings somewhere, but I believe quite a few of those ITs would fit my criteria of having been low rated underperformers just a few years ago .. If you're rotating with the star ratings, you'd presumably be catching some positive momentum – but I think that would lag a system of looking directly at momentum


Antony A
Posted: 24 October 2017 14:28:35(UTC)
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King Lodos;52134 wrote:


Those are a lot of the same ITs (or fund equivalents) I'm in at the moment ... But I'd note things like Fidelity China, TR European Growth, etc. weren't the best things to be in prior to 2016.

I assume FCSS's rating would've been on the floor the first two years after launch – famously underperforming with Bolton (although I thought the criticism was far too premature) – and then of course steaming back over the past year or two.

Maybe there are historic ratings somewhere, but I believe quite a few of those ITs would fit my criteria of having been low rated underperformers just a few years ago .. If you're rotating with the star ratings, you'd presumably be catching some positive momentum – but I think that would lag a system of looking directly at momentum





King Lodos: is it possible to search for trusts with particularly strong positive momentum using the free tools available on Trustnet and Morningstar? Or are you just reading between the statistical lines over different time periods at Trustnet, looking for good performers over say 6 months and a year and seeing if this is being sustained over shorter timeframes or extended over 2 and 3 years?

Monks and Independent are good examples of trusts that have seen strong recent momentum following changes of strategy over the last 2-3 years, pushing on until they have a premium over their NAVs. When the premium gets too high, it's hard to justify any new investment in these trusts, as it's unclear if the premiums, like the very high ones for 3i, Lindsell Train and now Shin Nippon (+9%), will be maintained, or whether the SP will fall back, as happened with SEC and JMF after Brexit.

I think BettyG must be rotating, as I find it hard to believe she's held onto a single share like Rio Tinto for six years, though all the mining ups and downs, and Monks and TRG were nothing special in 2011. I'm also puzzled why she holds 10% in bonds: 5% in property via TRY might justify itself in order to spread some risk, but given the "high octane" nature of her other choices, perhaps it would make more sense to stick with the high growth strategy throughout the portfolio? i.e accept the risk of greater volatility and put the 10% bonds into a US small-company trust like JUSC, or a US small-cap index tracker, or a technology trust like ATT (tech has actually been shown to be *less* volatile than almost all global trusts over a 5-10 year period). The portfolio has lots of good trusts but it seems particularly light on North America, tech and biotech: barely 5% (i.e. 40-50% of SMT and MNKS). 3i is mainly invested in Europe, IIT is really a UK small caps trust, despite it being in the International sector, and everything else has a regional or thematic specialism. Of course "everyone" is saying the US is over-valued, but it represents approximately 50% of global stock markets and arguably ought therefore to represent a large slug of anyone's long term portfolio.
King Lodos
Posted: 24 October 2017 16:22:47(UTC)
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Antony A;52316 wrote:
King Lodos: is it possible to search for trusts with particularly strong positive momentum using the free tools available on Trustnet and Morningstar? Or are you just reading between the statistical lines over different time periods at Trustnet, looking for good performers over say 6 months and a year and seeing if this is being sustained over shorter timeframes or extended over 2 and 3 years?

Monks and Independent are good examples of trusts that have seen strong recent momentum following changes of strategy over the last 2-3 years, pushing on until they have a premium over their NAVs. When the premium gets too high, it's hard to justify any new investment in these trusts, as it's unclear if the premiums, like the very high ones for 3i, Lindsell Train and now Shin Nippon (+9%), will be maintained, or whether the SP will fall back, as happened with SEC and JMF after Brexit.

I think BettyG must be rotating, as I find it hard to believe she's held onto a single share like Rio Tinto for six years, though all the mining ups and downs, and Monks and TRG were nothing special in 2011. I'm also puzzled why she holds 10% in bonds: 5% in property via TRY might justify itself in order to spread some risk, but given the "high octane" nature of her other choices, perhaps it would make more sense to stick with the high growth strategy throughout the portfolio? i.e accept the risk of greater volatility and put the 10% bonds into a US small-company trust like JUSC, or a US small-cap index tracker, or a technology trust like ATT (tech has actually been shown to be *less* volatile than almost all global trusts over a 5-10 year period). The portfolio has lots of good trusts but it seems particularly light on North America, tech and biotech: barely 5% (i.e. 40-50% of SMT and MNKS). 3i is mainly invested in Europe, IIT is really a UK small caps trust, despite it being in the International sector, and everything else has a regional or thematic specialism. Of course "everyone" is saying the US is over-valued, but it represents approximately 50% of global stock markets and arguably ought therefore to represent a large slug of anyone's long term portfolio.


It is .. If you can find any performance league tables of trusts or funds, over 3m, 6m, 12m, etc. you get a basic momentum screen..

The real caution – and the reason I don't usually recommend people follow momentum (even though I've found it makes the most sense) – is that there a NO rules .. Momentum is measurable in every market, but how we measure it defines the results we'll get .. (and they can be awful)

There's a good page of research on momentum here:
http://www.dualmomentum.net/2017/07/trend-following-research.html

But actually a lot of the examples they consider positive, I'd consider cautionary tales.

Here's a backtest of Time Series Momentum from 1971 .. So it's done great over the whole period – but I'd consider how poorly it's done since 2009 a real problem .. I'd want to have abandoned that system before I lost 5% on it – and either gone to cash, gone to a passive buy-and-hold strategy, or changed my rules very quickly. (Some traders halve their positions with every 3-5% loss – get your traded portfolio so small you can get a grip; try different things; change rules; and not risk real money ... Risk management is really more important than the rules you use)

https://2.bp.blogspot.com/-iGrtTELdCk8/WWb6mZrnOMI/AAAAAAAACuI/0CZj3XJxqowdByupBHTij0Dvp8aTe3lEgCLcBGAs/s640/Georgo2.PNG

Another example of various trend-following strategies – but again, the huge fall-off in results after 2000, here, shows how badly the previous way of measuring momentum would've done .. I can't believe they're using this to sell momentum as a strategy – I'd consider 17 years of losing money a serious problem.

https://4.bp.blogspot.com/-0F-TJDehsa8/WWbliXqM8eI/AAAAAAAACtw/t26xHs4AuJIIHgm4iX4eJ9NCmA5PATh5wCEwYBhgL/s640/DSouza2.PNG

So it's funny, because the academia side are quite good at measuring and demonstrating momentum, but in practice you wouldn't touch a fund they were running .. I'd also warn that (in my opinion for the most part) momentum only really predicts the next 1 or 2 months .. So you have to spot changes in trend within weeks, and review holdings at least monthly.


RE: bonds/property

I wouldn't personally have more than 50% of my portfolio actively traded in a single strategy and asset class like that .. At the moment, I'm almost all in Emerging Mkts and European Small-Caps in stocks, and my whole net worth in those two things would feel unnerving.

It's very much about your own psychology .. Overconfidence is how people wipe themselves out, and nerves just stop people making trades .. So you have to find a level of risk exposure that feels right.
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