In an April 21, 2015 column, New York Times reporter Nathaniel Popper observed that, over the last few years, a growing line of mutual funds created by the likes of Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo have attracted billions of dollars from investors looking to earn a good return.
Popper noted that in the latest 10-year period, Morningstar data showed that only 38% of Morgan Stanley’s mutual funds outperformed their analyst-assigned benchmarks. Thus, while the fees these funds have generated are among the few consistent bright spots of growth on Wall Street, there is still a question for investors: Have these banks’ actively managed mutual funds actually been good investment choices?
Today, I’ll provide further insights into that question as I continue my series evaluating the performance of the market’s foremost actively managed fund families with an in-depth look at Morgan Stanley Investment Management.
According to Morningstar, as of April 30, 2015, Morgan Stanley had over $34 billion in assets under management in mutual funds. The firm’s website states: “Morgan Stanley Investment Management strives to provide outstanding long-term investment performance and best-in-class service to a diverse client base, which includes governments, institutions, corporations and individuals worldwide. Our global structure leverages the breadth, depth and access of the Morgan Stanley franchise to provide our clients a comprehensive suite of investment management solutions.”
Does Morgan Stanley deliver on what they strive for? Have its funds been adding value for investors, or was the firm the real beneficiary?
Active versus passive
As is my practice, I’ll compare the performance of Morgan Stanley’s actively managed equity funds to similar fund offerings from two prominent providers of passively managed funds, Dimensional Fund Advisors (DFA) and Vanguard. (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.)
To keep the list to a manageable number of funds, and to make sure I examine long-term results through full economic cycles, the period covered will be the 15 years from April 2000 through March 2015. I’ll use the lowest-cost shares when more than one class of fund is available for the full period. In cases where Morgan Stanley has more than one fund in an asset class, I’ll use the average return of its funds in the comparison. The table below shows the performance of 13 of Morgan Stanley’s mutual funds covering seven asset classes – five domestic funds and eight international funds.
April 2000 - March 2015
|
Fund
|
Symbol
|
Annualized Return (%)
|
Expense Ratio (%)
|
|
U.S. Large Growth
|
|
|
|
|
Morgan Stanley Multi-Cap Growth
|
CPODX
|
0.2
|
0.92
|
|
Morgan Stanley Institutional Opportunity
|
MGELX
|
3.0
|
1.67
|
|
Morgan Stanley Institutional Growth
|
MSEGX
|
4.0
|
0.96
|
|
Consulting Group Large Cap Growth
|
TLGUX
|
1.9
|
0.67
|
|
Morgan Stanley Average
|
|
2.3
|
1.06
|
|
Vanguard Growth Index
|
VIGRX
|
3.2
|
0.08
|
| |
|
|
|
|
U.S. Large Value
|
|
|
|
|
Consulting Group Large Cap Value Equity
|
TLVUX
|
4.9
|
0.67
|
|
DFA U.S. Large Cap Value I
|
DFLVX
|
8.7
|
0.27
|
|
Vanguard Value Index
|
VIVIX
|
5.7
|
0.08
|
| |
|
|
|
|
U.S. Small Growth
|
|
|
|
|
Morgan Stanley Institutional Small Company Growth
|
MSSGX
|
4.4
|
1.05
|
|
Consulting Group Small Cap Growth
|
TSGUX
|
3.8
|
0.92
|
|
Morgan Stanley Average
|
|
4.1
|
0.99
|
|
Vanguard Small Cap Growth Index
|
VISGX
|
8.5
|
0.23
|
| |
|
|
|
|
U.S. Small Value
|
|
|
|
|
Consulting Group Small Cap Value Equity
|
TSVUX
|
11.6
|
0.92
|
|
DFA U.S. Small Cap Value I
|
DFSVX
|
11.2
|
0.52
|
|
Vanguard Small Cap Value Index
|
VSIIX
|
10.7
|
0.08
|
| |
|
|
|
|
U.S. Real Estate
|
|
|
|
|
Morgan Stanley Institutional U.S. Real Estate
|
MSUSX
|
13.2
|
1.01
|
|
DFA Real Estate Securities
|
DFREX
|
12.8
|
0.18
|
|
Vanguard REIT Index
|
VGSIX
|
12.7
|
0.24
|
| |
|
|
|
|
International Large Blend
|
|
|
|
|
Morgan Stanley Institutional Active Int’l Allocation
|
MSACX
|
3.3
|
0.90
|
|
Morgan Stanley Institutional International Equity
|
MSIQX
|
6.2
|
0.95
|
|
Consulting Group International Equity Investor
|
TIEUX
|
1.8
|
0.81
|
|
Morgan Stanley Average
|
|
3.7
|
0.89
|
|
DFA Large Cap International I
|
DFALX
|
3.0
|
0.28
|
|
Vanguard Developed Markets Index
|
VTMGX
|
3.0
|
0.09
|
| |
|
|
|
|
Emerging Markets
|
|
|
|
|
Morgan Stanley Institutional Emerging Markets
|
MGEMX
|
5.3
|
1.25
|
|
Consulting Group Emerging Markets Equity
|
TEMUX
|
5.3
|
1.09
|
|
Morgan Stanley Average
|
|
5.3
|
1.17
|
|
DFA Emerging Markets I
|
DFEMX
|
7.5
|
0.56
|
|
Vanguard Emerging Markets Index
|
VEIEX
|
7.4
|
0.33
|
The following is a synopsis of the most important takeaways from the data in the above table:
- In the five asset classes for which there are comparable DFA funds, the Morgan Stanley funds provided a higher return in three. However, in the three where Morgan Stanley funds outperformed, the average outperformance was only 0.5 percentage points. On the other hand, in the two asset classes in which Morgan Stanley funds underperformed, the average underperformance was 3.0 percentage points. This finding is consistent with prior research, which has shown that when active management outperforms, the tendency is for the outperformance to be relatively small; when it underperforms, the gap tends to be wider.
- In the seven asset classes for which there are comparable Vanguard funds, the Morgan Stanley funds provided a higher return in three. In the three asset classes in which Morgan Stanley funds outperformed, the average outperformance was 0.7 percentage points. By contrast, in the four in which they underperformed, the average underperformance was 2.1 percentage points.
- A portfolio of Morgan Stanley funds, equal-weighted in the five asset classes for which there are comparable DFA funds, returned 7.7%. The average expense ratio of funds used for that portfolio was 0.95%. An equally weighted portfolio of DFA funds in the same asset classes returned 8.6% a year, outperforming the comparable Morgan Stanley portfolio by 0.9 percentage points a year. The average expense ratio of the funds in the DFA portfolio was 0.36%. The underperformance of the Morgan Stanley funds isn’t fully explained by the difference (0.59 percentage points) in the expense ratios of the funds. It’s also worth noting that in the supposedly inefficient asset class of emerging markets, Morgan Stanley’s fund underperformed.
- In the seven asset classes for which comparable Vanguard funds were available, an equal-weighted portfolio of Morgan Stanley funds returned 6.4% a year. The average expense ratio of funds used for that portfolio was 0.96%. An equal-weighted portfolio of Vanguard funds in the same asset classes returned 7.6% a year, outperforming the Morgan Stanley funds by 1.2 percentage points. The average expense ratio for the funds in the Vanguard portfolio was 0.16%. Once again, we see that the higher expenses (0.80 percentage points) of Morgan Stanley’s fund didn’t fully explain the difference in returns.
Factor analysis
I’ll now take a look at the performance of Morgan Stanley’s funds using the analytical tools and data available at Portfolio Visualizer. The following table shows the results of the three-factor (beta, size and value), four-factor (adding momentum) and six-factor (adding quality and low beta) analysis for the firm’s domestic funds (excluding the real estate fund). The data covers the same 15-year period from April 2000 through March 2015. The t-stats are in parentheses.
April 2000-March 2015
|
Fund
|
Symbol
|
Three-Factor Annual Alpha (%)
|
Four-Factor Annual Alpha (%)
|
Six-Factor Annual Alpha (%)
|
|
Morgan Stanley Multi-Cap Growth
|
CPODX
|
0.9
(-0.3)
|
-1.4
(-0.5)
|
2.6
(1.0)
|
|
Morgan Stanley Institutional Opportunity
|
MGELX
|
0.0
(0.0)
|
0.0
(0.0)
|
-1.8
(-0.9)
|
|
Morgan Stanley Institutional Growth
|
MSEGX
|
1.0
(0.6)
|
1.0
(0.6)
|
-0.4
(-0.2)
|
|
Consulting Group Large Cap Growth
|
TLGUX
|
-0.2
(-0.2)
|
-0.3
(-0.3)
|
0.1
(0.1)
|
|
Consulting Group Large Cap Value Equity
|
TLVUX
|
-0.4
(-0.3)
|
0.1
(0.0)
|
-1.6
(-1.6)
|
|
Morgan Stanley Institutional Small Company Growth
|
MSSGX
|
-0.8
(-0.4)
|
-1.6
(-0.9)
|
0.4
(0.2)
|
|
Consulting Group Small Cap Growth
|
TSGUX
|
-1.8
(-1.0)
|
-2.8
(-1.9)
|
-1.8
(-1.1)
|
|
Consulting Group Small Cap Value Equity
|
TSVUX
|
2.2
(1.6)
|
2.1
(1.6)
|
-1.0
(0.7)
|
|
Morgan Stanley Average
|
|
0.1
|
-0.4
|
-0.4
|
When we examine the results from the three-factor analysis, we find that three of the eight Morgan Stanley funds generated positive annual alphas, though none were statistically significant at the 5% level. The average annual alpha was 0.1%.
When we look at results from the four-factor analysis, we also find that three of the eight Morgan Stanley funds generated annual alphas. Again, however, none were statistically significant at the 5% level. The average annual alpha was -0.4%.
When we include all six factors, we find that three of the eight funds generated positive annual alphas. Yet again, none were statistically significant at the 5% level. The average annual alpha was -0.4%.
There are two more important points to consider. All the above data is based on pre-tax results. For investors holding these funds in taxable accounts, the active management of Morgan Stanley funds very likely would have produced more negative tax consequences than the passively managed alternatives from either DFA or Vanguard. Second, Morningstar data unfortunately contains survivorship bias. Thus, it’s possible that there were Morgan Stanley funds that had performed poorly in the past and were either merged into better performing funds or closed.
Clearly, with an average expense ratio of close to 1%, the growth in mutual fund assets under management has been very good for Morgan Stanley’s bottom line. Unfortunately, the news wasn’t as good for investors in the firm’s funds. While Morgan Stanley’s website states that it strives to provide outstanding long-term investment performance, it has failed to do so.
In fact, my analysis demonstrates that Morgan Stanley’s funds were subtracting value relative to the performance of either the DFA or Vanguard alternatives. And that’s before even considering the important issues of survivorship bias and taxes (for taxable investors). In terms of the factor analysis, there was no evidence that Morgan Stanley’s fund managers were able to persistently exploit market inefficiencies.
Larry Swedroe is director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country.
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