Jeffrey Ptak

http://socialize.morningstar.com/NewSocialize/blogs/M_Jeffrey/default.aspx

2 Comments

    • ON: Mon Apr 21st 14:01 PM
      Commented on:
      ETFs and OEFs: Funds and Taxes
      Hi Kevin.

      One of the questions-and-answers in the WSJ piece you cited reads as follows:

      "6) True or false: Heavy redemptions will leave an index mutual fund saddled with hefty capital gains.

      ANSWER: False. Again, it isn't necessarily so. Any index-fund manager "worth his salt routinely harvests losses that can be used to offset gains as realized," says Mr. Ptak."

      So, it's not as if the piece didn't address the question of flows and their impact on tax efficiency.

      If you see the potential for 'enormous' differences between the tax-efficiency of open-end index mutual funds and comparable ETFs, I'd like to understand how. Past isn't prologue, I understand. But it's not as if the largest indexers---most of whom I'd consider 'worth their salt'--have had problems with giant cap gains distributions in the past. Given that, while I would ordinarily expect an ETF to be more tax-efficient, I again wouldn't foresee a scenario where there'd be huge differences.

      Regards,

      Jeff Ptak
      Morningstar, Inc.
      View article »
    • ON: Mon Mar 17th 13:19 PM
      Commented on:
      Morningstar's 'Vastly Superior' ETF Research?
      Hi Kevin.

      A few corrections and clarifications:

      - You indicated upthread that our approach assumes the whole (ETF fair value estimate) is worth more than the sum of its parts (individual stock fair value estimates). That's factually incorrect. An ETF's fair value estimate, under our approach, is worth no more than the sum of its parts—it’s simply a weighted-average based on the weighting of the holdings and their fair value estimates. The whole can potentially exceed the sum of the parts only from a risk standpoint (i.e., benefits of diversification make ETF less volatile than its component stocks).
      - In your piece you suggested that the expected return that I cited for XLF covered a 52-week time horizon. Not so. Our stock, and ETF, ratings assume a three-year holding period. In other words, one would expect the convergence of price to fair value to take place over that three-year horizon. Meaning that your math is incorrect.
      - You suggest upthread that the valuation-centric ETF research that we're conducting is less useful since it fails to help investors who are using ETFs as part of a long-term strategic allocation. Never mind that we're continuing to provide research that addresses an ETF's merits as a potential portfolio building block (i.e., are fees low? is it tax-efficient? does the portfolio construction make sense? has it tracked the benchmark? etc.).
      - In the piece, you indicate that our approach doesn't adequately account for 'uncertainty'. Yet, our approach explicitly allows for the uncertainty inherent in our forecasts. It's called a 'margin of safety' and it's the discount to our fair value estimate that we demand before recommending a security. The more uncertain the forecasts underpinning a fair value estimate, the larger the margin of safety we demand before recommending a security, and vice versa. Our assessment of a security's uncertainty, in turn, is a function of its quality (intractable competitive advantages, like P&G, vs., say, some flaky biotech firm) and non-financial 'event risk' (i.e., big tobacco litigation, Vioxx settlements, etc.). It’s a very similar approach to the one popularized by Warren Buffett.

      I hope this is useful.

      Regards,

      Jeff Ptak
      Morningstar, Inc.
      View article »
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