March 6, 2012
Attain Capital
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It’s been over a year since we last dedicated a newsletter to the so-called managed futures mutual fund/ETF, and we thought it was high time we revisited the subject. Our last piece looked at the big name fund operators in the field– namely, the Wisdom Tree Managed Futures ETF (WDTI) and Rydex Managed Futures Fund (RYMFX)- arguing that these products were misnamed and did not give investors the type of managed futures exposure they were likely after when investing. While their performance then and to date has continued to be lackluster and well below managed futures as an asset class, it doesn’t seem to have hurt the popularity of the idea, with several smaller players now joining the fray to the tune of 19 such funds now clamoring after investor’s managed futures money. Hey, Morningstar even made them a fund category (anyone out there still arguing against their being an asset class?).
We found ourselves scratching our heads. Just why is so much money pouring into these so-called managed futures mutual funds when they have done very little in the way of performance? Part of the answer is the classic line from the brokerage side of Wall Street which says stocks (insert ETFs, mutual funds, mortgage backed securities, etc.) are sold, not bought- meaning that money is pouring into these products because that’s what the army of advisers (they don’t really call themselves stock brokers anymore) around the world are pitching to their clients, not the other way around.
But that begs the question… Why are these funds being sold so heartily? Part of that answer has to do with high fees for selling them, part of it is because people are still skeptical of stocks, and part of it is because managed futures is still a good story (boiled down in one line to – hey, it performed in 2008- even if past performance is not necessarily indicative of future results).
And that answer begs another question, do these advisors really know what they are selling (a recent blog posts says no) when it comes to managed futures exposure? Are the investors in so-called managed futures mutual funds really understanding what they are getting?
Well, we’re going to do our part to make sure those investors do know what they are getting, with an in-depth look at these products, and, unfortunately for the product managers, our research into the full universe of these publically traded products unearthed even more levels of complexity than we saw previously.
Click here to see the full piece.
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March 15, 2012
[…] Managed Futures Mutual Funds Exposed (managed-futures-blog.attaincapital.com) […]
April 2, 2012
Thank you very much for this article. Very compelling as to why “managed futures mutual funds” are not a good investment.
BTW, I’m not sure if your question “anyone out there still arguing against their being an asset class?” was meant to be rhetorical, but apparently there is actually a very long list. Most relevant given you implied the “Morningstar Managed Futures Category” is proof of being an asset class is actually the anyone named John Rekenthaler, VP of Research at Morningstar. During a March 23, 2012 interview regarding alternative funds, John states, “We can start by differentiating between alternative strategies. So, an alternative strategy would be something like a long-short fund or maybe option writing strategies where you own securities and write options or manage futures. And then there is an alternative asset, say owning a commodity, owning oil futures or something like that.” You can listen to the entire interview at https://www.morningstar.com/Cover/videoCenter.aspx?id=538462.
Added to that list would be Morningstar researchers Samuel Lee and Nadia Papagiannis which repeatedly refer to managed futures as a “strategy” in their research paper, Managed Futures Category Handbook. You can find a copy here https://advisor.morningstar.com/uploaded/pdf/Alt_Managed-Category.pdf.
Perhaps Morningstar categories are based on something other than asset class distinction? By taking a quick glance at Morningstar’s Investing Glossary and reading their definition on “Morningstar Category”, we can see that the words “asset class” only appear one time. And that one time is to help describe the inner workings of the “Target-Date Portfolios” category, which I’m sure we all would agree is not an asset class, just like managed futures is not an asset class, at least according to Morningstar.
Thanks again for the great article.
April 5, 2012
Jason,
Thanks for commenting. Our justification for managed futures being an asset class is not derived from how it is referred to colloquially, but a breakdown of academic literature on the defining parameters of an asset class. We covered this last year, but you can view it here: https://www.attaincapital.com/alternative-investment-education/managed-futures-newsletter/investment-research-analysis/426/
And to be clear, it’s not that we think all managed futures mutual funds are evil incarnate. Some of these funds are false advertising at their best, but others are not all bad. Our issue is that it’s a largely inefficient way to gain access to an otherwise potentially beneficial asset class for the right investors.