More research for a dedicated observer Rekenthaler returns to Morningstar

July 05, 1998|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

At age 37, John Rekenthaler is too young for anyone to call him a sage. But he does qualify as a dedicated observer of the mutual fund industry and portfolio investing generally.

A year ago, I wished Rekenthaler well when he left the Chicago-based mutual fund research firm Morningstar and took a job literally across the street at fund manager John Nuveen & Co.

Rekenthaler, one of the original Morningstar staff members in 1987, held the title of publisher but was best known for his offbeat commentaries on the firm's World Wide Web site, www.morningstar.net. At Nuveen, he kept his hand in by writing Morningstar's "Ivory Towers" Web column.

Now, he's back, a little wiser, to take a newly created post of director of research at Morningstar. Rekenthaler said he felt isolated at Nuveen, which is known primarily for its municipal bonds but is expanding into equity funds.

"I thought I went into the fund industry with completely open eyes in the sense of fully knowing the atmosphere, and I don't think I was entirely correct," he said.

For one thing, Rekenthaler realized that the primary focus of fund companies -- especially publicly traded firms such as Nuveen -- is not necessarily shareholders of the funds they manage.

During his brief tenure, Nuveen had a well-publicized confrontation with a minority shareholder of the company upset about low stock price performance and high executive compensation.

"Fund shareholders are just one constituency to satisfy," he said recently. "I don't think the words 'our shareholders' -- meaning mutual fund shareholders -- come up very often."

Morningstar is hardly aloof from such pressures. Amid rumors that the privately held firm might go public, Morningstar in March hired Tim Armour, former president of Stein Roe Mutual Funds, ** to a new post of chief operating officer to boost the business and leverage the Morningstar name.

Morningstar's customers include fund companies as well as financial advisers and individual investors -- constituents whose interests can diverge sharply.

Morningstar intends to be neutral in any real or potential conflicts and let its research speak for itself, Rekenthaler said.

But a question persists: How much more research into mutual fund investing do we really need?

The marketing imperative that things constantly be "new and improved" can't be ignored.

But it's hard to imagine what useful truths lie out there that haven't been analyzed to death already by fund companies, academics, the financial press and Morningstar itself.

Rekenthaler disagrees. "I think there's a lot that remains to be learned about how you measure excellence in funds and what are their benchmarks," he said. "Do you have some hope of assessing what might do well over the next five years?"

Certainly, a technique of predicting the best fund performance has yet to be devised. Most studies have the advantage of 20/20 hindsight and contain little predictive value. Moreover, the goal of mutual fund analysis is a moving target, in part because what people desire in their investments changes.

Investors -- notably baby boomers -- are enthralled with what Rekenthaler calls the accumulation phase of their lives.

The demographic stereotype that makes fund companies salivate is the 50-somethings, who are staring retirement in the face and whose children have completed college.

Many of these individuals want to accumulate a nest egg while they have the chance and are eager to get professional help by letting someone else manage their money on a fee basis. Billions can be made by charging 2 percent to manage the baby boom wealth.

There always will be people, young and old, who desire to beat the market. But in the foreseeable future, the accumulation phase will change into the spending phase for many baby boomers.

When that happens, investors who have enjoyed compounding their winnings in the 15-year bull market -- in effect, playing with house money -- will realize their next investment risks the nest egg they need to support their lifestyle in retirement.

"The spending phase requires a very different kind of investment, and liquidity becomes very important," Rekenthaler said.

"A bear market is not just a test of courage. You will be selling off [for personal income] a part of your assets at low prices. Your ability to absorb losses is much less."

Pub Date: 7/05/98

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