The Wall Street Journal - 07.10.2019

THE WALL STREET JOURNAL. Monday, October 7, 2019 |R13

JOURNAL REPORT | INVESTING IN FUNDS & ETFS

California, Davis, the paper makes a

solid case that investor confusion is

widespread. But he adds that a

broader examination of the phenome-

non could reveal that companies

sometimes are connected in ways the

authors might not fully understand.

Dr. Balashov says it’s true that

some unobservable common factors

could be influencing co-movement in

some companies’ stocks, but he

doesn’t believe such factors were the

driving force behind the co-move-

ments for the 31 pairs the study iden-

tified as being most closely linked.

Meanwhile, there are lessons to

be drawn from their current re-

search, Dr. Balashov says. Do your

research, of course—and “double-

check before you buy or sell.”

Mr. Kasselis a writer in

New York. He can be reached

[email protected].

Vadim Balashov, an author of the

study and an assistant professor of fi-

nance at Rutgers University’s School

of Business in Camden, N.J., says he

was surprised at how “negligent” in-

vestors could be. His co-author is An-

drei Nikiforov, also an assistant pro-

fessor of finance at Rutgers.

Experts say the paper, published

in June in the Journal of Financial

Markets, builds on a small but in-

triguing body of research.

“It basically, to me, just reinforces

the view that there are investors

who are not particularly sophisti-

cated but are willing to pull the trig-

ger,” says Terrence Odean, a profes-

sor of finance at the University of

California, Berkeley’s Haas School of

Business, whose research has fo-

cused on investor behavior.

According to Brad Barber, a profes-

sor of finance at the Graduate School

of Management at the University of

Some Stock Trading

Is Simply Confusion

Investors who quickly buy or sell a stock

in the news can sometimes wind up

with the wrong one, a study finds

T

he next time you buy a stock, you might

want to make sure it’s the right one for

the company you want to invest in.

Mistaking one stock for another happens

more often than you might think, according

to a new study. The research suggests that

investors sometimes buy the wrong stock because of confu-

sion between companies that have similar names or ticker

symbols but otherwise have no meaningful

connection.

For instance, investors who look up the

symbol FORD may think they are going to

buy stock in Ford Motor Co., but that sym-

bol actually denotes Forward Industries

Inc., which designs and distributes prod-

ucts for the consumer-electronics indus-

try. Ford’s ticker symbol is simply F.

Researchers analyzed a sample of 254

pairs of companies with ticker symbols or

names that might confuse investors, in-

cluding BBBY (Bed Bath & Beyond Inc.)

and BED (Bedford Property Investors Inc.,

which has since been acquired). For every

pair, one company was substantially

larger than the other.

The researchers found that at least 31

of the 254 pairs exhibited “co-movement,”

meaning an increase in trading volume

for the bigger company coincided with an

increase for the smaller company during

10-minute intervals pulled from a sample

period between 1993 and 2013. Such up-

ticks in volume usually occurred around a

news event such as an earnings an-

nouncement, an analyst forecast or a

merger related to the larger company. On average, the

researchers found, about 5% of the total trading volume

for the smaller company could be attributed to acciden-

tal trading.

They also found that incidents in which investors acci-

dentally bought into the smaller company drove the com-

pany’s stock price up half a percentage point, on average,

in the 10 minutes after a news event. Both individual and

institutional investors contributed to those movements.

BYMATTHEWKASSEL

INVESTOR BEHAVIOR

BRYAN SMITH/ZUMA WIRE

Two small changes inMorningstar’s fund-ratings

system could continue the trend of downward pres-

sure on the fees investors pay to asset managers and

financial advisers.

Scheduled to start later in October, the forward-

looking, medal-themed designations that the rating

firm’s analysts apply to mutual funds and exchange-

traded funds—Gold, Silver and Bronze, as well as

Neutral and Negative—will rest not only on each

fund’s prospects for beating its peer group, but also

on prospects for beating an index. Second, medal

considerations will be weighed independently for

share classes (A, B, C and so on) of the same fund to

reflect the separate benefits and fees each class has.

A third change is assessing if a strategy is hospi-

table to active management. (The other part of

Morningstar’s system—the backward-looking star

rating measuring a fund’s volatility-adjusted returns

relative to a peer group—remains unchanged.)

The reasoning behind the changes: the easy avail-

ability of low-cost index funds that track indexes ac-

curately. Judging a fund against an index, not just its

peers, is a way of acknowledging that many inves-

tors have shifted from investing in actively managed

funds that invest in similar stocks to investing in

low-cost ETFs that accurately track the same stocks.

A peer group alone is thus an inadequate point of

comparison for an active fund.

The second change highlights the dizzying range

of fees that result from differently priced share

classes in the same fund. If one share class of, say,

a bond fund has an expense ratio that is 1.5 or more

percentage points higher than other share classes in

the same fund, that share class deserves a bleak

forecast no matter how well the lowest-cost share

class of the fund has performed in the past.

A published Morningstar study indicates that a

little more than half of the 1,567 funds the firm cov-

ers with multiple share classes will go from one

medal rating across all share classes to two or three.

The medal change may also shine a harsher light

on high-price 401(k) fees.

Some funds have R classes, for example, signify-

ing the share class is for holding in retirement plans

like 401(k)s. This class can carry an expense ratio of

1% and more because such plans have administrative

costs. A revised medal rating on these funds might

encourage small businesses—most likely to suffer

from expensive plans—to find cheaper solutions.

Mr. Coumarianos, a former Morningstar analyst,

is a writer in New Jersey. He can be reached at

[email protected].

CHANGE COMING

FOR FUND-RATING

MEDALS SYSTEM

BYJOHNCOUMARIANOS