Beware Of Morningstar Mischaracterizations

A couple of quick things tonight. 

First is a model ETF portfolio that I was able to get a look at. I won't get into specific funds and weightings but the basic idea was a lot of factor funds and very ordinary fixed income exposure including the Fidelity version of the AGG and some others that will look pretty similar to AGG.

There's not a lot of differentiation except in 2022 when the model was down about 300 basis points less than VBAIX and this year it is about 500 basis points ahead. 

Back to the factors, the model has 17 holdings, eight of which are different factor funds. To the extent a market cap weighted fund takes in all the factors, when you add too many different factors together they sort of wash out and drift toward looking a lot like market cap weighting which presumably they are trying to avoid. For anyone wanting to go down the factor road, I think it can be done more effectively with far fewer funds. Eight different ones seems like being too clever by half.

And second, a new fund alert; the Absolute Flexible Fund (FLXIX). It is convertible arbitrage-ish in that it won't always hedge every position. It says it should have about half the "beta" of high yield. It has been around for almost four years, has very little in assets and is nominally expensive. It isn't a yield play, paying out 2,88% but a portion of that is capital gains. 

The comparison is to AGG, high yield with HYG and then a couple of convertible bond funds. Just eyeballing it, I'm not sure how AGG is less volatile but FLXIX exceeds the volatility expectation versus HYG.

The fund only gets two stars from Morningstar because it is in the convertible bond category but it is not a long only fund like the majority of the category. Morningstar has miscategorized the fund. The typical convertible bond fund has a lot of equity beta and whether FLXIX is a good fund or a crappy fund, it has pretty much no equity beta. 

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