Morningstar's John Rekenthaler covered the insufficiencies and limitations of charts when talking about factors in mutual fund performance, going in to more depth on a recent DFA [profile] survey. In a recent column, Rekenthaler tackled the DFA results, providing charts that showed funds with higher Morningstar ratings tended to survive longer than those with low ratings.

Rekenthaler points out that charts without context, measures of statistical significance or average results or use of more reliable factors, will, of course, conveniently lessen the importance of a certain factor and make the chart look so chaotic that no rhyme or reason can be discerned from it. Having the scatterplot on one axis and returns on the other also ignores survivorship and gets rid of dead funds data which may be the most useful to understanding what factors are important, Rekenthaler says.

The charts Rekenthaler shows, which consist of clusters of blue dots following no particular pattern, were released from DFA's advisor communications group not its research group. Rekenthaler writes, "…they were used to wean their clients from the habit of expecting funds with high star ratings and/or Sharpe ratios." Having the scatterplot on one axis and returns on the other also ignores survivorship.

To read more, click here.  

Edited by: Casey Quinlan


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