(PUB) Investing 2015

9

Septemb er 2015

Morningstar FundInvestor

Active Funds’ Success Rate by Category (%)

Average Performance (%)

10-Year (Lowest Cost)

10-Year (Highest Cost)

Asset-Weighted Performance

Equal-Weighted Performance

Category

1-Year

3-Year

5-Year

10-Year

U.S. Large Blend

32.7

35.6

25.1

21.6

29.7

9.9

Active Passive Active

Passive

U.S. Large Value

21.3

49.0

25.4

38.2

66.3

18.6

U.S. Large Blend

6.74

7.68

6.42

7.24

U.S. Large Growth

42.3

26.0

12.2

16.9

28.9

14.2

U.S. Large Value

6.76

7.31

6.24

6.52

U.S. Mid Blend

36.5

34.5

23.8

13.7

21.7

4.6

U.S. Large Growth

8.05

9.27

7.12

8.27

U.S. Mid Value

20.9

34.8

13.5

54.4

68.2

27.3

U.S. Mid Blend

7.78

9.28

7.10

8.82

U.S. Mid Growth

48.0

37.0

31.1

26.8

47.1

13.4

U.S. Mid Value

8.38

7.82

7.99

7.49

U.S. Small Blend

40.7

35.5

37.1

38.9

35.7

34.2

U.S. Mid Growth

8.70

9.34

7.76

8.54

U.S. Small Value

25.2

22.0

47.7

48.4

52.2

34.8

U.S. Small Blend

7.63

8.52

6.93

7.72

U.S. Small Growth

51.4

40.8

30.2

24.4

33.8

17.9

U.S. Small Value

7.86

7.93

7.04

7.01

Foreign Large Blend

47.0

44.8

52.8

40.2

58.5

34.2

U.S. Small Growth

8.14

9.13

6.92

8.33

Diversified Emerging Markets

58.2

70.4

65.8

36.6

47.4

22.2

Foreign Large Blend

5.48

4.32

4.00

3.79

Intermediate-Term Bond

47.9

73.0

69.7

42.4

54.9

30.5

Diversified Emerging Markets 8.32

7.70

7.33

7.97

Source: Morningstar. Data and calculations as of 12/31/14.

Intermediate Term Bond

4.96

4.56

4.04

4.16

Source: Morningstar. Data and calculations from 01/01/05–12/31/14.

p Odds of success generally decreased over longer time periods, with value-oriented funds being the notable exception.

p Passive funds generated both higher asset- and equal-weighted average returns than their active counterparts in the large-blend, large-value, large- growth, mid-blend, mid-growth, small-blend, and small-growth categories. p Active funds beat their passive counterparts on both an asset- and equal-weighted basis in the mid- value and foreign large-blend categories. They also generated higher asset-weighted returns in the diversified emerging-markets and intermediate-term bond categories. These results represent a snapshot in time, and they may change. But this report effectively captures how an investor’s original opportunity set has fared, and in doing so, it helps investors better gauge the performance of actively and passively managed funds. Its focus on real index funds as a perform- ance benchmark is an important step forward because it reflects an investor’s experience better than an index. Finally, this research adds to the preponderance of evidence that fees matter. Investors can improve their odds of success with low-cost active funds. Expensive funds hurt those odds. K Contact Ben Johnson at ben.johnson@morningstar.comz

p Value managers had a higher long-term success rate than other types of active funds.

p The lowest-cost mid-value funds enjoyed the greatest long-term success rate ( 68% ) and the highest-cost mid-blend funds the lowest ( 5% ). p Long-term success rates were generally higher among small-cap, mid-cap, foreign, and intermediate- term bond funds than U.S. large-cap funds. The success rates do not take the magnitude of outperformance or underperformance into account, so they are not influenced by outliers. However, outliers can influence the asset-weighted and equal-weighted average category returns, which are reported in the table below. To calculate the equal-weighted returns, we first take the asset-weighted average share class returns for funds with multiple share classes and then equal-weight the composite returns for each fund.