A legendary investment writer reflects on what’s changed and what hasn’t over his decadeslong career.
Our guest this week is our colleague, John Rekenthaler. John is retiring from Morningstar after 36 years. He was one of Morningstar’s early hires. Joe Mansueto and Don Phillips brought John on as a mutual fund analyst in 1988, and he rose to become the company’s vice president of research. He worked on many of Morningstar’s foundational methodologies, including the star rating and style box, and helped launch the retirement business. But he’s best known as author of “The Rekenthaler Report,” an investment column on Morningstar.com that has become one of the most popular and widely cited in investing in personal finance. John holds a BA from the University of Pennsylvania and an MBA from the University of Chicago. John, welcome back to The Long View.
Background
john.rekenthaler@morningstar.com
“Farewell, for Now,” by John Rekenthaler, Morningstar.com, Nov. 12, 2024.
“The Best (and Worst) of John Rekenthaler, in His Own Words,” by Emelia Fredlick, Morningstar.com, Jan. 24, 2025.
Other
“Christine Benz and John Rekenthaler: How Much Can You Safely Spend in Retirement?” The Long View podcast, Morningstar.com, Dec. 21, 2021.
Christine Benz: Hi and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Dan Lefkovitz: And I’m Dan Lefkovitz, strategist for Morningstar Indexes.
Benz: Our guest this week is our colleague, John Rekenthaler. John is retiring from Morningstar after 36 years. He was one of Morningstar’s early hires. Joe Mansueto and Don Phillips brought John on as a mutual fund analyst in 1988, and he rose to become the company’s vice president of research. He worked on many of Morningstar’s foundational methodologies, including the star rating and style box, and helped launch the retirement business. But he’s best known as author of “The Rekenthaler Report,” an investment column on Morningstar.com that has become one of the most popular and widely cited in investing in personal finance. John holds a BA from the University of Pennsylvania and an MBA from the University of Chicago. John, welcome back to The Long View.
John Rekenthaler: Good to be here, Christine and Dan.
Benz: It’s good to have you here. So you have announced your retirement. You’ve officially retired. Your last column was called “Farewell for Now.” So it’s not your last column? Maybe talk about your thoughts about transitioning into retirement.
Rekenthaler: Yeah, I will be writing future columns for Morningstar and keeping my Morningstar email address. So if anybody wants to reach me, john.rekenthaler@morningstar.com, I’ve had that email address a long time since when the internet was invented just about. And really, I’m not planning on doing a lot different than what I’m doing now, except for the pay part. I’m going to continue to write. In fact, I’m going to start a blog where it’s going to be quite similar to what I do, have done in my column, and will occasionally do in articles going forward for Morningstar, which is I’ll ask a question. There’s a common perception of something. People say this or people believe this. Is it true? I think that’s kind of the heart of what I’ve done in my work, is—is it true? And run the data and run the numbers and try to be grounded in what the reality is. And sometimes what people say is mostly true, largely true, and sometimes not very much. So I’m just going to do that for a blog of my own, which I can’t give any information about yet. I haven’t started, but I think it’ll be on Substack. Just on broader topics than only investments.
But it’ll be the same sort of thing. I can tell you, give you a hint: The first topic I’ve been looking at and thinking about is on issues of violent death. Of course, people think of somebody getting pushed into a subway, which is such a very, very, very, very small portion of the possibilities, or the percentage of time that people die unexpectedly, sort of violent deaths, or unexpected accidental deaths, whether it’s from overdose or traffic fatality or this or that. So just running through the numbers and get a sense of how common are these things. And other things that are more common, which there are, that you really don’t think about and talk about much. So it’s that sort of thing—trying to, in some cases, deflate misperceptions and, in other cases, increase perceptions of what really is out there. So trying to shine a light, which is what Morningstar has always done. I mean, that’s what we’ve been about.
Benz: But it sounds like you’ll be broadening your purview quite a bit.
Rekenthaler: Definitely broadening my purview. I can’t publish that article on Morningstar.com. It’s not that Morningstar has anything against such articles, but it’s not directly relevant. That one’s not really relevant to investing issues. And I would be writing on economics more than I have been. I’ve done a little bit of that at Morningstar, but in general, the economics again has to be generally pretty connected directly with investment issues, as opposed to one of the questions I’ve been noodling over. And I saw some research on this. What was the effect of NAFTA on lower-income workers in the United States? There was a lot of talk at the time about this would drive out jobs; did it drive out jobs? So that sort of thing. These are topics that interest me, but again, NAFTA’s effect on lower-income workers is probably not at Morningstar.com. It’s hard to figure out how to turn that into an investment idea.
Lefkovitz: Yeah. And we understand you’ve received one or two pieces of feedback from your farewell column. Can you talk about some of the messages you’ve received? Common themes, surprise?
Rekenthaler: Yeah, it was really touching. My wife called it the eulogies. But it was like the Mark Twain, isn’t it the Mark Twain episode where he shows up and hears this Tom Sawyer or Huck Finn, or one of those, he hears his own, I think Tom Sawyer. Anyway, he hears his eulogies. That’s kind of what I felt like. It’s like, I didn’t have to die. It’s nice. But you can’t pull that trick too often.
Lefkovitz: You get one shot.
Rekenthaler: I think the number of letters will start declining if I keep doing farewells and asking for more nice letters. They were very nice. But there were a couple of themes that came out of them. One is that, although I don’t think I particularly write with the intent of being directly useful. I talked about it. I need to connect with investment topics. But Christine, your work is—I’ve got it right here—is really very directed. What to do with your Roth IRA, what to do with it. It’s very clear the benefit to investors of that. Mine’s a more exploratory often, but people felt rightly or wrongly. I tended to feel that I had been helpful to them, very helpful to them in their investment process and helped them to be more successful. So that was very heartening to hear because I want readers to profit and do well. But I have to confess, again, I’m writing, I’m doing my articles with topics that interest me.
The other thing I heard, which was also very heartening was retirement. Oh man, it’s the best. I’ve been retired 17 years. I got to tell you, this is the best gig I’ve ever had. Now, it’s a selected audience. If this were a poll, you know, the poll would get thrown out for being skewed because I’m hearing from people who have paid attention to investing, they paid attention to their finances. I didn’t have anybody write to me talking about having problems with their finances. So obviously that’s a huge, a huge comfort in retirement. And I presume that most of them had good physical health, too. So when you have those two things, it’s quite different than being in retirement without either one of them. But people just, they like it. I’m two weeks in and I’ve been, I’ve been pretty busy. I can’t really say I truly started retirement yet except for the not getting paid part.
Lefkovitz: And you heard from some financial advisors in addition to individuals?
Rekenthaler: Yeah, one of the things, also I had always thought of my audience. I knew I have some advisors that I hear from with my article, but the vast majority were do-it-yourself investors. Well, like the Boglehead-type crowd, they’re not necessarily Bogleheads, but similar sorts of people. I heard from a lot of financial advisors, and I realized, again, talk about skewed samples. My normal sample—advisors are reading my material and probably yours, Christine, I’m sure, and others that we’re doing. But they’re busy, they’ve got practices to maintain and clients and so forth. So they’re not necessarily dropping a note in the same way that a do-it-yourself investor, particularly retired one, might have a little more time to do. So yeah, about a quarter of the letters I got were from people in the business. So that was a learning experience for me and a lesson. Because I’m always talking about perceptions versus misperceptions. And if you would have asked me, I would have given you the wrong answer. And I realized, I had not really thought through the issue very well.
Benz: John, you said that you made the decision to retire really kind of quickly, that it was a Saturday night.
Rekenthaler: Saturday night.
Benz: Yeah, and you were not relishing the idea of writing your column the next day. And you said that you’ve had a habit of making big decisions fairly quickly. Can you talk about that?
Rekenthaler: Yeah, this is not the kind of advice to give to other people, right?
Benz: Maybe it is.
Lefkovitz: Do as I say, not as I do.
Benz: It’s intriguing to me.
Rekenthaler: Yeah, my wife and I, we tend to make big decisions on impulse. We moved a year and a half ago from Chicago, where she had lived in Chicago area her whole life. She was born and raised, lived her entire life in Chicago. I moved here in 1985 and had been from 1985 to 2023 in Chicago. And we were empty nesters, and her mom was about to pass. And so we had been in the area and part with that, but our kid was gone. Like, where should we go? And about two, three days, we said, let’s move to New York City. And about six weeks later, we had made three trips to New York, looked at like 30 places, put in a bid and bought a place. So we live now in the Upper West Side of Manhattan. And we enjoy the city living. And that’s our forever place. Well, it’s faster than that because that took us three days to get there. The Morningstar one was about 30 seconds. I was like, wait, no, I don’t want to get up. Because Sunday, Monday was my publication schedule to file on Monday night. It’s like, Sunday’s coming tomorrow. I don’t really feel like doing it.
And, then it just clearly, I had been thinking about these things in the back of my mind for a long time. And we had talked a little bit informally and like, what would you do and that sort of thing. It just all clicked into place. And I said, no, it’s time, I’m ready. And I feel really ready. I’m definitely kind of keeping busy. You’ve heard me talking about that. But it just felt like it was time for me to continue writing but broaden the kind of things, write more on my schedule for what I want to do. And just going a slightly different direction. It was an easy decision. But that’s how I tend to do things. And then we’ll stew over the little stuff. Don’t sweat the little stuff. And we’ll debate that for a long time.
Lefkovitz: It sounds like you’ll be doing things on your terms, which is what retirement is about.
Rekenthaler: I can’t say I’ve ever regretted these kinds of big decisions. I don’t feel like if I spent more time on them, I’d get to a better place. But it’s personal. Other people might want to map this all out. I’ve got readers who are engineers, and I know how they work. They probably put a spreadsheet with pros and cons and a scoring system and all that kind of thing. And that’s fine too. I’m more intuitive. In terms of my work, I tend to be, I have a kind of intuitive or a hypothesis, and I don’t have any process for coming up with ideas for what I would write about. People send me ideas sometimes; I love it. Please feel free, listeners, to send me ideas about things because I do. But I just stumble across them. Then once I come across a hypothesis, then I’m pretty organized and rigorous. And I move from left brain to right brain, right brain to left brain—whatever, the other side of the brain. And that I’m actually quite structured on, but I’m not structured in getting to that point.
Lefkovitz: Well, we thought it’d be cool to hear about your origin story, how you came to Morningstar in the first place and how your career and how the company has evolved. So maybe you can talk about 1988.
Rekenthaler: I’ve been talking about accidents, right? Or I guess things going in a different direction than you might expect. And certainly my arrival at Morningstar was, because I ended up at Morningstar, an investment research company, because of the stock market crash of 1987. You’d think that’s when you would lose your investment research job after the stock market crash. But I was working in a different field. I had been hired only in August 1987. It was my first real job. I had gone to grad school in English and left and was sort of bouncing around working temp jobs. And I got a job as a technical writer on manufacturing field. It was not the sort of thing that one was going to have a career on, but I was happy to at least start there. And I started in August 1987, Oct. 19, the stock market dropped 22%. And it was just a very shocking event at the time, 22% in a single day, widespread belief that this was 1929 all over again.
In fact, that The Wall Street Journal and the papers kept printing graphs showing overlaying the 1929, October 1929, both in October, with 1987 and how similar they were. And the guy who had hired me for his small family business panicked and laid me off in mid-December because he was worried that the recession was coming. And ironically, Morningstar, as an investment research firm, seemed to be the only place that was hiring at the time. Because Joe Mansueto, its founder—Joe never believes that depression is coming, or recession is coming. If you’ve ever met a more optimistic person, good luck to you, but I never have. So Joe was like, we’re going to be growing. I need people. And I knew somebody, Don Phillips, who worked at Morningstar, we’d been in school together. And so, one thing led to another. So I showed up at Morningstar as eager as any and grateful as any starting employee could be. A former English major and grad school dropout without a job. So happy to be getting paid on a job. And I was ready to run through a brick wall for that company, and the company gave back and then some a lot more what I gave to it.
Lefkovitz: It sounds like, unlike Don, you hadn’t grown up with investing.
Rekenthaler: Yeah. That was the other aspect. Don, ended up at Morningstar by, well, I suppose I did by choice, but Don’s situation was different. Don had studied economics as an undergrad. He came from a family that was investors. His father had been CEO of a company. He actually had a job offer from a major consulting firm for exactly double what Morningstar paid him. And he chose not to take that job and work for this company that was, when Don joined, it was about eight people or something, that nobody had ever heard of. At half the salary with zero benefit. I mean, zero benefits, nothing. Because he believed in the vision of it, and he had a startup mentality.
So Don came in and Don set the tone because Don knew about investments. I didn’t know about investments. It’s not like I started immediately writing about investments. I had to learn about the business. So I was, going through prospectuses and shareholder reports and reading through them and entering data. And I was a data-entry person but absorbing and reading The Wall Street Journal and reading Barron’s and reading Berkshire Hathaway reports and, I was fortunate to be able to talk to Don, talk to Joe. Joe had been a former equity analyst and was trained in this. So I had great sources around me as well to supplement what I was reading. And, it was a bootstrap organization, as any small company is, I did everything but program. I didn’t program, but you do everything else. And you hope it works, and it did work.
Benz: You’ve said that, even though you didn’t have an appreciation for investing when you started, you did appreciate that Joe was approaching things differently. Can you talk about that? Like the difference with him and your previous boss.
Rekenthaler: My number one advice would be, and this is the one thing I did know. So there were so many things I did not know, but I realized very quickly—the previous place where I’d worked was a family business that had about 20 people working, about the same size as Morningstar. But they had 20 people working there 10 years before. And I bet they had 20 people working there 10 years after. It was a place where the owner was doing very well, had a very large house and golf membership. The rest of us, we were getting paid, but there was never any real chance of great growth or moving up to the extent that you were going to advance in the organization probably meant somebody was going to leave or retire.
I joined and Joe was like 30 years old. He’s putting every… He was just living in a one-bedroom apartment, putting every penny back into his, not some big mansion, no golf, none of that stuff. Putting every penny back into the company. And very quickly I did realize, wow, that’s different because he’s trying to grow this thing. And if we go from $1 million in business—which we were doing—to $2 million to $3 million, whatever, and we’re not going to be 18 people, we’ll be 30 people, we’ll be 40 people, we’ll be 50. Well, I’m number 18. If I keep my nose clean and work hard. I’m senior to those people. I may get promoted, and there’s more money to go around and there’s more responsibility to go around. And just the energy, the energy. And I was a young, just turned 27. I was 27 and one week old when I started, and I was right at the median age. So just the energy of the youth. The previous company where I’d been, the average age was probably 45 or something like that. Nothing against companies with average age of 45, we’re trying to get there now.
Benz: We are.
Rekenthaler: I’m a little north of that myself.
Lefkovitz: After you retire, it’ll bring down the average.
Rekenthaler: Let’s just say it was a great place, great environment for me at the time. The other thing to mention though is, although I give that advice, find a growth situation, growth situations are hard. We had 50% turnover of employees for the first few years I was at Morningstar. Literally 18 people, nine would be around 12 months later. And then so you’re always hiring. And if you’re growing, you need to hire even more than nine. It’s hard because things are changing and people, a lot of people don’t like change. It feels, it’s uncomfortable. Everybody’s learning on the job. So it doesn’t necessarily mean you’re good at that, particularly management. We’re all learning how to be managers as more people come in. And teachers, and managing and teaching well, it’s an acquired skill in most cases. So I look back and if you were to ask me, what are your regrets? What did you do worse on the job? It clearly would be as an early manager, micromanaging employees and just being annoying. I’m always grateful and surprised that people I managed back in the day actually still talk to me. I thank them for that. They’re more gracious maybe than I might have been.
Lefkovitz: So you talked about that data entry job and then you were a mutual fund analyst. So you were calling portfolio managers in the hope of writing something useful to investors about their funds. But talk about that experience of just dialing, trying to reach those portfolio managers and getting something out of them.
Rekenthaler: Yeah, it was pre-email. So you were just calling and sometimes the organization would have some sort of barrier up or fence up to protect the portfolio managers. You’d have to work through that department, and you’d explain, I worked for Morningstar. They never heard of Morningstar. Well, we’re Morningstar, we provide the data for Businessweek. That was our big early coup is that Businessweek was the one. There were a lot of publications, The Journal and Barron’s and Money magazine and Fortune and Forbes and many others. But Businessweek was the one where we had a contract to send the data. So we’d say, well, we send the data to Businessweek. And they hear the word Businessweek, they might think we might actually be worth talking to. And that tended to work pretty well. But often you just reach the portfolio manager, and it would be their phone on their desk, and they would just be getting calls from traders all day. And you weren’t a trader and they’d be like, who the heck are you?
Or other words they would use sometimes. Yeah, it can be that kind of industry with the language sometimes. And so but after a little while, almost everybody started to comply, and they realized. The word started getting out and people would say, what’s the Morningstar report say in your fund? And people would start referencing us. And we started getting quoted a lot in the financial press. And so once the Morningstar name became well-circulated… For the most part, the portfolio managers were pretty good about it. Clearly not all of them wanted to talk to us, but their marketing department would say you should. So we went in a couple of years from when I started, it was still iffy whether somebody would talk to you, but two, three years later it was pretty much a routine thing. It was hard for people. I can’t blame them because when we started mutual funds, like there were a lot of mutual fund data out there and you can see total returns, but people weren’t writing. We were effectively writing critical reviews, like a movie review. It’s hard if you’re saying something that’s critical of the fund.
This is their whole work that’s going into this. And you’re saying, well, we don’t think this fund is very good or maybe it’s not the best or you could buy another fund or something like that. So, it took a while for some people to realize that was kind of part of the job. You were in the public eye if you were a mutual fund portfolio manager, which most other portfolio managers weren’t in the public eye. If you were running institutional money and so forth, you had other pressures, but you didn’t have people out there in public saying, this fund is really struggling or made bad decisions. So again, I think all things being equal, they were pretty gracious as well, given we had the easy job. We’re the critics, we’re the nitpickers, they had to create something. As someone once told me, he said, it’s a lot easier to criticize than it is to create, and they were the creators.
Benz: Maybe you can talk about how the fund industry was situated when you started. There were a lot of funds cropping up, being introduced, active management was kind of the standard.
Rekenthaler: That’s right.
Benz: And fees were much higher than they are today, but maybe you can set the stage for what the fund industry looked like when you started.
Rekenthaler: The industry was quite different. Now it’s a fully mature industry, with giant Vanguard, BlackRock, State Street, Fidelity, a few giant names with a lot of index funds, and all the funds that sell these days are low cost. Back in the day was a lot more Wild West. I started in 1988, really the modern fund industry started in 1984, say. The industry had almost died during the 1970s because stock and bond returns were so bad. It was just the invention of the money market fund that really kept a lot of these—there was more money in money market funds than there were in the stock and bond funds for a while. But the stock markets starting and bond markets starting in 1982 started their 1980’s rally and, money started to come into the industry in the mid-80s. And it was booming.
So our timing was very good in terms of getting in there when the fund industry kicked off. But it was a lot of companies throwing stuff against the wall trying to figure out what stuck. So a lot of gimmicky funds. We see that somewhat in the ETF marketplace today. But a big difference was that the brokerage firms thought that having the distribution, having the brokers, that was the key to success was having a closed system. So you had Prudential beige funds, you had Payne Webber funds, you had Dean Witter funds, you had Merrill Lynch funds, you had shares of the Lehman funds. These were all bigger than—Vanguard wasn’t a top-10 fund company at the time. So these load funds, that was the terminology back in the day. Brokerage sold so you could never buy a Dean Witter fund unless it was through a Dean Witter advisor. But then on the flip side of that was a Dean Witter advisor was supposed to only sell Dean Witter funds.
Now that model didn’t turn out well in the end because a lot of those funds weren’t very good— customers felt they were being fed something rather than the best of the industry. It wasn’t a customer-friendly model. And then you had a lot of small boutique firms without that distribution on the side, just hoping. They were like lottery tickets. I mean, $5 million funds run by somebody out of their garage. And if they get three years of really good returns in a row, maybe they’ll get noticed. Those people will talk to you. I guarantee you that. So, one of the stories I tell is calling a guy and his wife picked up the phone and he said, “Bernie’s mowing the lawn right now.” And then you hear, “Bernie, it’s Morningstar!”
Benz: Did Bernie come in?
Rekenthaler: Bernie came in. Bernie came in. So, yeah, you don’t get too much of that these days.
Lefkovitz: I’m curious, what were some of the gimmicks that you saw early in your career?
Rekenthaler: Well, some of them are eternal. Like when I started at Morningstar, the biggest mutual funds in the US then, probably the world, were government-bond funds that wrote options against the government. So they would sell options, call options on the bonds, and they would distribute the proceeds in those options as yield. Technically it was not income; that’s short-term capital gains. But it was like, you’re getting a government-guaranteed security—you used to be able to say government guarantee. You can’t say that anymore because, as we know—we learned a lot in 2022—bonds can go down and lose price. People were shocked when they did. So, there were a lot of option-writing government bonds. And now that’s back in.
You’ve got all kinds of funds citing their income these days, writing options and doing these. Again, they’re in ETFs now rather than mutual funds. And they’re equally misunderstood, at least at a lower cost today. Those funds tended to have like 1.5% expense ratios on the government bond fund.
There were lot of market-timing funds, especially after 1987, because after the crash, everybody wants to dodge the next crash, but you’re not going to have the next crash probably. And by the time the next crash happens, all those crash-dodging funds have disappeared because they did poorly. So, that’s another ironic thing.
Lefkovitz: Market-timing meaning like a tactical allocation?
Rekenthaler: Market-timing. Yeah, more than just a not tactical allocation in the sense of, I’m 60% stocks, maybe I’ll change to 50%. Like, I’m 0% stocks, I’m going to go to 100%; or I’m 100%, I’m going to go to 0%. So, funds that can dodge the crash. And then people publishing studies—these five or seven funds managed to get out in October 1987 and dodge the crash. Yeah, they dodged like the next 11 crashes that didn’t exist.
So, they all trailed the market. It was a long time until there was a real crash. It wasn’t really until the 2000, 2002 technology. It wasn’t until 13 years later that there was something to dodge. By then, none of them existed.
So, I developed a distaste for market-timing and tactical-allocation funds that has really not changed to this day. And I haven’t had much reason to change my—I will change my opinion if the facts convince me, but they have not.
There were others. There was something called short-term multimarket income fund. How’s that for a name? And they would buy high-yielding European currencies—this is before the euro. So, they would buy like the Italian lira, or the Greek was a drachma currency. And they would sell the Deutschmark, sell the low-yielding, and see that would give you a spread and as long as the currencies… And the currencies were supposed to converge because there was an exchange-rate mechanism that was going to create the euro, and they didn’t tell you why it was the perfect safe trade. And then it fell apart. The exchange-rate mechanism didn’t work and actually the lower-yielding currencies went the opposite direction and lost relative to the high yield. So, the stuff that you were long on outperformed the stuff you were shorting, and then all of a sudden, these things that were sold as cash alternatives lost like 8% or 10% in about six weeks, and everybody redeemed them and blah, blah, blah.
So, this is the history of complex funds that aren’t well explained. And I knew that. This was early in my career. This could be pretty complicated stuff, these short-term, multimarket income funds with these long these currencies, short these currencies, exchange-rate mechanism.
And I knew that there was more possibility of danger than any of the portfolio managers would let on, but nobody really told me when I would interview the portfolio managers. And that was another lesson for me, too.
And I think it wasn’t always just trying to deceive me, it’s because they didn’t see the possibilities either. People tend to—in the field that they’re working in—they’re believers. They were believers. And it was hard for them to confront the possibility that their beliefs might work in a different direction. So that also was a lot of early lessons about understanding psychology and understanding most of the time when people are deceiving you, they’re deceiving themselves as well. I mean, sometimes. There are definitely people out there that are just out there to sell something, but it’s not always. So, if you want to be a good investment analyst or just an analyst in general, you need to understand how psychology plays into how people think about risks. And I always thought that the most valuable service that we do for people is to explain the risks in funds, because we can’t predict the futures. But if we can show them the possibilities, what kinds of factors these funds might be susceptible for, what are the dangers?
In some cases, this fund doesn’t face these particular dangers. I always felt my role was to let people… If they understand the possibilities and feel well informed, you’re much less likely to make an emotional decision; make a more rational decision. I think that’s our role. Maybe there’s someone here who can predict where the markets are going, but I haven’t been so good at that. I’ve got a 50% track record.
Lefkovitz: You also worked on some of Morningstar’s foundational quantitative methodologies, like the star rating and the style box, and you helped develop the category system for funds. Can you talk about how that development went and evolved and the philosophy behind it?
Rekenthaler: That was fun because we were early. And when you’re early, you don’t have to worry too much about being better than somebody else. All you have to do is be better than what exists before. And if nothing exists before, hey, you’re doing a great job almost no matter what you come up with.
Like the Morningstar Style Box, for example, we were actually—when I say we, Don Phillips and I really worked on that together. We weren’t the first, we were the second in that. The institutional consultants had already come up with something—a four-corner style box in the 1980s that they started to use to describe investments when they were talking about how portfolio managers invest. There was an appreciation starting about late 1970s, 1980, that small companies and large companies could perform differently and value stocks and growth stocks. And it started to be those distinctions made like in the academic literature and such. So 1980s, it goes from the academic literature to the institutional consultants. And they had this four-corner, was the fund large growth, large value, small growth, small value? And Don and I were, like what the heck, where’s the S&P 500 fit? Where’s the market fit? It’s not value, it’s not growth. Where’s the middle ground? Most of the funds aren’t really those. That doesn’t work. We need a value, we need growth, but we need something in the middle to describe funds that kind of do both. And the same thing, there’s large and there’s small, but what about the mid-cap?
So, we took that four-corner initial style box that was in the institutional marketplace, took it to the retail or the broad marketplace as a nine-grid box. And we also changed things because they were doing it a bit ad hoc. We were running the portfolios through this big computer process and assigning all these things. So, it was very systematic. Whereas it had been ad hoc and more by manager description. The consultants weren’t taking all the portfolios and running them through.
I can’t recall whether they were assigning these boxes based on what the manager said or just from eyeballing the portfolios, but it wasn’t done in a systematic way. So, we expanded and systematized—if that’s the word—an idea that had already been there. It was still early enough where all we had to do was go from step one to step two. And we didn’t have to go from step 11 to step 12 or so. And the business has matured a lot since then, which is good for everybody— good for investors, but it’s harder to innovate in a meaningful way, in a way that really makes a mark that we were able to do back in the early days.
Lefkovitz: And the evolution of the star rating, my understanding is when it started out, it was sort of done at the broad asset-class level?
Rekenthaler: Yeah, when we started off, we rated all US stock funds against each other, all international stock funds, municipal-bond funds, and taxable-bond funds. Now, there was some value in doing that. The benefit of the star rating was that it was the first fund evaluation that incorporated risk. Everything else was just total return only. So, you’d see list, and it would always be the highest-returning funds. These were risk adjusted. This was, again, the academic ideas: you need risk-adjusted returns. And we had a competitor who said, well, you can’t spend risk. So, his firm didn’t do risk-adjusted returns, but you do need to risk adjust returns. There’s a reason why people are willing to accept lower returns on short-term or intermediate-term notes that are guaranteed by the government than owning AI stocks. So, risk does matter.
So, when the star rating came out, just by having a risk-adjusted return and looking and telling people this is the most important way to look at funds, that was a step forward. But the problem was the groups were too large. And we realized after a while, wait a moment, if large-growth stocks, the big technology stocks have a nice five-year run, all the 5-star funds are going to be the big technology funds. We don’t really want to be in the business of telling people, these are all the best funds. There’s an underlying factor that were missing in our ratings. And we wanted to sort at least the major factors out. So, then we switched, after a few years to doing the star rating based on the investment categories.
And to do the star rating based on the investment categories, you had to get the categories right, which meant a big change because we had, when I joined Morningstar as with everyone else, we were grouping funds according to their self-descriptions. So, a fund would say, I’m an aggressive growth fund, I’m an equity-income fund. Well I guess funds don’t talk, but their marketing people do. And we said, well, if we’re going to give star ratings according to their categories or their groupings, it didn’t matter when we were doing a star rating over all —we could figure out this is a US stock fund. But if we’re going to do star ratings over these more discrete smaller groups, we had to get the groups right. And that’s when we started running all the portfolios through our machine and then just assigning them. So, we could be a case where the fund would say, this is a large-growth fund. And we’d say, yeah, well, you say you’re a large-growth fund, we don’t call you a large-growth fund. We’re just going to say you’re a mid-cap growth fund or a mid-cap blend fund. And that just didn’t necessarily please them, but that was the better way of doing it.
So that’s what happened. At the same time, we changed the star rating system, and had it applied to smaller groups, where the funds were relatively homogenous. And at the same time made it so that we were creating better groups.
Benz: Wanted to ask about the growth of indexing, which is a phenomenon that you’ve certainly observed over your career. So, you made a prediction fairly early on about indexing’s eventual success. Or you said that indexing was going to be larger than people grasped at the time. Can you talk about that? And what made you think that?
Rekenthaler: Yeah, well, we talked about impulse.
Benz: Yeah.
Rekenthaler: So, I think it was 1994, I got a call from Money Magazine. And at the time, indexing was 1% or 2% maybe of all mutual fund assets. And they said, well, how large can that become in mutual funds? How much can it grow to? And I’d seen that with institutional investors, US equity assets by then were up to about 30% indexing. Again, the institutions, it goes from academics, academics already said you should be indexing the institutions. So, just off the cuff, I said, well, it could be 30%. And so that showed up as like a big pull quote in Money and then my picture is there. Rekenthaler says indexing could be as much as 30% when it was like 2%. What the heck is this? It took a while, but of course…
Benz: Jack Bogle liked it.
Rekenthaler: Of course we were 50%. I also wrote around that time. And this was when Vanguard had just cracked the top 10 but was nowhere near the fund company. I wrote about it. I said Vanguard is the only true brand, distinctive brand in the fund industry. Because everybody else is trying to say I’m the best. And these are good companies, but everyone else—Fidelity, Janus, whatever—they were all competing for, we have the smartest managers, we do the most T-Rowe price, we do the most research, we turn over the most stones. And Vanguard was the only company out there.
Well, DFA was for financial advisors and sort of niche, but the general retail saying, no, no, we have that stuff, but we’re about low, low cost, consistency, just the whole Jack Bogle indexing message. And it was just so distinctive. So, I did predict there as well. And as we’re out at that time, I didn’t quite directly say Vanguard is going to become the largest fund company, but at least I hinted at it. But I shouldn’t talk all, there’s plenty of stuff that I did not...
Like the market-timers, I have plenty of predictions that never did occur. But that one I thought was – the success of indexing seemed to me pretty clear. But the problem is, a lot of people didn’t see it because the vast majority of the fund industry, they viewed indexing as they didn’t want to index, it was cannibalization. They’d put out the funds that would charge a lot less. And so, you had this huge amount of voices with a self-interest, which is a combination of, and sometimes trying to deceive you, and sometimes deceiving themselves, about why indexing could not succeed or all the different environments or how it was overrated. And that turned out to be wrong.
But it was a long time learning that lesson. All the way through 2008, they were saying, well, next time a big crash happens, you’ll see, these fully invested index could hammer, and the active managers will succeed. In 2008, the stocks were down 35%, 37%, whatever the market was, and the active funds pretty much matched the index. It’s not like the index dodged it, but they didn’t do better.
That’s when pretty much the public stopped believing. Of course there are exceptions. But, again, as a general principle, at least they… I should rephrase that and say what they really started to believe in this, whether you index or don’t index, make sure it’s cheap. Always have the cost working for you. Because as Jack Bogle himself said, when you say talk about low-cost indexing, he’s like low cost is the most important part of that, not the indexing part.
Lefkovitz: Vanguard has plenty of active.
Rekenthaler: High-cost indexing is not a good solution.
Lefkovitz: The topic of your last column was the triumph of equities, or especially US…
Rekenthaler: Triumph of the optimist?
Lefkovitz: Triumph of the optimist. Right.
Rekenthaler: I didn’t use that phrase, but yes.
Lefkovitz: Despite these periodic crashes, including the one that started your career, the returns have just been phenomenal over the long-term. And you talked about why investing is not like gambling. Can you talk a little bit about that?
Rekenthaler: Well, sure. I think most people know that in gambling, the house—the odds are, this is pretty trivial stuff, but it’s useful for people to remember this. And the people who really keep this in their head are the ones who are writing to me who’ve been successful.
The house is with you when you’re investing. Over time, equities, they make more money than inflation. The United States has been particularly successful, but you look at other countries, that’s true. As long as the countries have relatively healthy economies, and they don’t have complete political disaster and so forth, equities make money than inflation over time, meaning you’re making money in real terms over time. So, the longer you’re in and the more money you have, likely the better off that you’ll be. And it’s tried, but it’s true.
And people still get distracted. I can see—bitcoin has done so well, and people attempted to buy bitcoin instead, and maybe they’ll do better than with stocks, but bitcoin has no, there’s no underlying economic—there’s no cash associated with it. It’s not just bitcoin, any crypto, they’re never going to pay you cash. The only time you get a value out of that is if someone pays you more. Well, with stocks, it’s different.
If you look at Morningstar, when I started at the company, while our free cash flow was zero because Joe was running a breakeven but doing $1 million in sales. And when the company went public, I think, I don’t know what it was, maybe we’re doing five, well, it’s pretty much still breakeven, but maybe $5 million in free cash flow. Now the company is $600 million in annual free cash flow. That’s not a mirage. That $600 million or so that it’s just throwing off. And it’s just an example. That’s just the one that’s close to home. And I suppose I should put in my compliance thing: I’m not selling Morningstar stock. You can add that. Or Berkshire Hathaway or just all these companies, these are real businesses, and they grow their businesses. And if the managers were to choose to distribute these monies as dividends, you’d have a big fat yield.
There’s fundamental reality to this. And that’s again, what I’ve tried to convey to people: stocks are not gambling in the long-term. There’s no sure thing, but it’s a sensible risk that you’re taking with a high likelihood of a payoff. It’s not just hoping you get lucky. It’s really just hoping you don’t get unlucky because the normal treatment is you’re going to do well.
Now, that said, our CEO, Kunal today was talking about looking into 2025, the stock market has been feeling a little rich and giddy. And I do think it’s a little giddy. So, I felt a little bit when I was writing that “Farewell for Now” column being optimistic. My timing might be slightly off in the short-term. I’m a little nervous about what’s happening—Kunal used the term animal spirits out there. There’s a lot of happiness going on in the market. It’s a risk-on kind of mindset, but that doesn’t change the validity of my message, I believe over the longer term. But if you lose money in 2025, Dan, I’ve warned you right now.
Lefkovitz: So, you’re moving to cash? One of those market-timing managers?
Rekenthaler: No, no, but there are times on the margins of my portfolio where I have a little more cash, a little less. And this is a little more time, just on the margins, though. Nobody can resist the temptation, at least I can’t. I certainly can resist the temptation to do anything more than a couple of percent of the portfolio.
Benz: I’m curious, John, we’ve worked on some retirement income research together. Are you planning to apply any of that to your own plan in retirement?
Rekenthaler: I think about it. Our paper, we tend to come up with… Last year it was, we said 4% is a safe withdrawal. And there are various assumptions that are in there, a 30-year time horizon, and it’s an inflexible spending pattern. So, you can improve that as our paper shows in various ways by being more flexible and so forth. But I tend to think of that 4% number, which we arrived at through calculations. So, it wasn’t just—it happens to match up with the old rule of thumb as something to try to stay under. And I’m definitely under that in terms of my spending pattern.
So, yes, I’m not using every lesson of the paper because it doesn’t apply. It depends on personal circumstances and so forth. Now, in my case, since I’m quite a bit under the 4%, if you look through our paper, it will show that’s the highest number you should take out if you want to be able to have a high success rate or so forth. But if you’re taking out a lower percentage, just I am, it’s under 3%, you can afford to own more equities than the portfolio that our paper tends to recommend. You can take on more risk in your portfolio because you’re taking less money out during the downturns. So, it does tie in with my strategy because I’m pretty equity-heavy for somebody in my position. But I can afford to do so given my spending rates.
Lefkovitz: Maybe we’ve got time for one more. I think for both Christine and me, you’ve always been a must-read. Who are must-reads for you? Who are the investment writers or writers outside of investing that you tend to come back to?
Rekenthaler: That is a good question. Well, I think most of us in the industry tend to read Matt Levine from Bloomberg, he’s sort of an insider thing. James Mackintosh from The Wall Street Journal and Greg Ip, write great economic columns and so forth.
Of course, I’d be remiss in not mentioning every writer at Morningstar as well. So, those will be the investment.
Benz: Jason Zweig?
Rekenthaler: Jason Zweig, of course. Yeah, good mention. Sorry, Jason!
Rekenthaler: Bill Bernstein, he is the blogger and, also a book writer, mutual friend of ours. So, there are a lot of sources out there, but those are some that pop to mind. And since I will return to my roots and say, don’t forget Mr. Shakespeare. He won’t teach you much about investing, but he withstands many rereadings. And I still do.
Benz: Well, John, this is not goodbye. We will be hearing from you and in touch with you. But thank you so much for taking time out of your early retirement to sit down with Dan and me today.
Rekenthaler: Well, thank you guys for doing all the work and preparing the questions. I just had to sit here and answer.
Lefkovitz: Thanks, John. Farewell for now.
Rekenthaler: Thank you.
Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.
You can follow me on social media @Christine_Benz on X or at Christine Benz on LinkedIn.
Lefkovitz: And at Dan Lefkovitz on LinkedIn.
Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.
Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
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