Morningstar improving bond fund data reporting

The change could impact how advisers construct fixed-income portfolios for clients

Apr 4, 2019 @ 2:09 pm

By Greg Iacurci

Morningstar Inc. is changing up the way it reports fixed-income data for investors and financial advisers.

The switch relates to how Morningstar, which provides data and research on mutual funds and exchange-traded funds, reports important fixed-income metrics such as duration and credit quality. Morningstar currently relies on the data that are self-reported by asset managers, but it will start calculating the data internally as of July 31 for all fixed-income funds.

The goal, according to company officials, is to provide investors and advisers with increased transparency, objectivity and consistency in data reporting, which will help them compare funds in a more apples-to-apples way and more reliably construct portfolios. The change will also bring Morningstar's reporting on bond funds more in line with its reporting on equity funds.

(More: Beware misreading inverted yield curve)

"In general, fixed income is a very opaque — and huge — part of the market," said Tricia Rothschild, chief product officer at Morningstar. "And yet there's not yet a standard way to compare across asset managers things that might seem obvious, like duration, because all of the calculations are done specifically by, and are unique to, the asset manager."

"You can maybe do it [today] at a super-high institutional level of investing, but not at a retail, general-wealth-management level," Ms. Rothschild added.

(More: Risk-averse investors push advisers to their creative limits)

Bond mutual funds held $10.4 trillion in 2017 — roughly 21% of the more than $49 trillion held in open-end mutual funds, according to the Investment Company Institute. By comparison, equity funds held nearly $22 trillion. There are more than 2,100 total taxable and municipal bond funds, according to ICI.

Bond funds have seen net inflows for most of the past decade, according to ICI, largely because of the demographic shift in the U.S. caused by the aging of the baby boom generation. Older investors tend to shift more heavily toward fixed income.

Morningstar's upcoming change will impact the underlying data points the company uses to generate its mutual fund reports and style boxes, which are visual representations that help advisers identify the specific fixed-income category of a particular fund.

The latter component is important not only in portfolio construction, but in fund selection itself. Advisers and investors often compare funds within respective peer groups based on their performance, fees and other metrics. More reliably characterizing a fund category means lackluster funds will have a more difficult time hiding among peers, experts said.

"The more transparency we practitioners are provided the better," said Vance Barse, a financial adviser at Manning Wealth Management Inc.

Despite the popularity of bond funds, financial advisers are often "not as targeted" in making their bond allocations when compared with their equity allocations, said Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research.

Advisers understand well the various equity styles — small-, mid- and large-cap growth, value and blend funds — and try to put together allocations that include many of those styles, Mr. Rosenbluth said. However, when it comes to fixed income, they may use only two or three different styles, partly because they don't have the same data tools at their disposal, he said.

"I do think there's greater granularity within the equity space than within the bond space," Mr. Rosenbluth said.


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