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Investing Specialists

Morningstar Runs the Numbers

We take a numerical look through this week's Morningstar research. Plus, our most popular articles and videos for the week ended Oct. 21.

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Inspired by Harper's Index (with a tip of the hat to FiveThirtyEight's Significant Digits blog), Morningstar Runs the Numbers uses a numbers-based approach to highlight recent Morningstar research, along with some outside news stories.

2 Million
Karen Wallace reported this week that an enormous number of students eligible for college aid don't fill out the FAFSA to claim it:

According to government estimates, an estimated 2 million students who are enrolled in college and would be eligible for a Pell Grant never applied for aid. The maximum Pell Grant award for the 2016-17 school year is $5,815--an amount that goes a long way toward paying a tuition bill, and, unlike a loan, a grant doesn't need to be paid back.

New research from Javier Estrada, shows that when looking over a long time horizon, and across the world, the traditional 4% retirement withdraw rule has not fared well. John Rekenthaler summarizes: 

To the first point. Starting the study in 1900 rather than 1926 eliminates the 4% rule’s invulnerability. Using the longer time period, no longer does a U.S. investor withdrawing 4% per year from a fixed pool of assets (adjusted for inflation, so that each year that initial amount increases by the previous year’s CPI), invested in a 60/40 mix of stocks and bonds, always survive for 30 years. On 4.7% of occasions, the pool depletes. True, this depletion happens near the very end of that time period, but nonetheless, the exercise fails. 

While 4.7% might seem negligible, 23.3% is not. Which brings us to the second point. The latter figure represents the failure percentage of the world portfolio, again using rolling 30-year periods, beginning in 1900. The world portfolio also consists of 60% equities, 40% bonds, allocated according to global market capitalizations. It has fared much worse than the U.S.-only strategy.

Negative 30%
 Netflix (NFLX) soared this week after its quarterly earnings beat expectations. But Neil Macker warns that subscriber growth is slowing (down 30% in 2016 from 2015 levels) and that the firm will have to keep investing in original content. He sees the shares as overvalued today:

While we currently model a 10% average annual decline in total net U.S. from 2017 to 2020, with a 19% decrease in 2017, our projections (and consensus) may prove optimistic and problematic for the company. If management is correct that outperformance in the third quarter stemmed from consumer excitement around original content and issues with grandfathering drove the weak second-quarter performance, Netflix will need to keep ramping up its investment in original content at the expense of acquired content, without being able to rapidly increase its monthly fee, increasing pressure on margins.

A 0.3% cost-of-living adjustment for Social Security in 2017 means that the average recipient will get an extra $5 a month. Bob Johnson explained in a video interview this week why that is bad news for consumer spending:

It's a big deal, and I think it partly restraints some of the numbers this year, next year it's going to be even worse with the wage base issue. But it's very small increase that's out there and that's about one in five, one in six people in the U.S. economy get some type of benefit currently, that's tied to that number. And so they are not getting a rate increase and as we just talked about inflation is accelerating, but this is kind of look back number. So the chances are they are going to pay prices that are about 2% higher next year and they are not going to get any increase in their base. So that's really a nasty combination for a decent part of the economy. So clearly that's one of the reasons that we've been more pessimistic lately. We usually are relatively optimistic on the economy. But we've got some pretty grave concerns right now.

The Morningstar high-yield bond category is up almost 12% in 2016, making it one of the best-performing taxable bond categories this year. Sumit Desai looked at the bull and bear case for buying the asset class at these elevated valuation levels: 

Bullish investors would argue that high-yield bonds still offer an attractive absolute yield relative to other low-yielding areas like Treasuries. However, many also argue that the asset class is priced for perfection with little margin for error, as yields and spreads are currently below multiyear averages. Defaults outside of the energy sector are still relatively low but investors aren't currently being compensated for the risk of any uptick in bankruptcies in the future.

According to an article in The New York Times, about 8,000 aspiring bakers apply each season to be contestants on "The Great British Bake Off." The competition-style show has had a noticeable cultural impact, the Times says:

“In the six years it has been on the air, ‘The Great British Bake Off’ has fundamentally changed the way the British regard baking, dessert-eating and even their own culture of sweets. The ‘Bake Off Effect,’ as it is known, has manifested in a resurgence in home baking, a noticeable increase in the quality of baked goods sold all over the country, and a growing number of people pursuing careers as professional pastry chefs.”


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