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Rekenthaler Report

Using the Ownership Lens to Select Funds

Practical considerations for using the new statistic.

In Theory
The previous two columns have discussed the Morningstar Ownership Lens, a new measure born from a 2005 Journal of Finance paper. (“Judging Fund Managers by the Company They Keep,” Randolph Cohen, Joshua Coval, Lubos Pastor.) The Ownership Lens evaluates equity funds not by their own past performances but instead by the past performances of funds that hold similar portfolios.

This seems to me a strange and indirect method for assessing funds, but the Ownership Lens’ proponents counter that criticism with two claims: 1) By evaluating a group of funds, rather than a single fund, the measure reduces statistical “noise”; and 2) The calculation works. That is, funds with strong Ownership Lens scores post higher future returns than those with low scores.