(PUB) Investing 2015

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How Have Our Top-Rated Funds Performed? Tracking Morningstar Analyst Ratings | Russel Kinnel

get the Gold/Analyst Pick designation and go out when they are downgraded or the rating expires. We can then calculate the growth of $10 , 000 and compare with a benchmark. You can see the graphs displayed to your right. For U.S. equities, you see that our Gold/Analyst Pick portfolio had been beating the S & P 500 until recently, as mega-caps have pushed the S & P 500 ahead. However, the recent sell-off has brought them slightly behind. Currently, the 10 -year return for U.S. equity Gold-rated funds is 6 . 4% annualized compared with 6 . 8% for the S & P 500 . If you were to substitute an S & P 500 fund like Vanguard 500 Index VFIAX for the cost- free S & P 500 , then there would be almost a dead heat. For international equities, our Gold/Analyst Pick funds have a strong record of beating the MSCI EAFE Index. Over 10 years, they have returned 4 . 4% versus 3 . 0% for the index. The MSCI EAFE has gained a bit of ground lately, however, as the index has less in emerging markets than most actively managed funds. In taxable bonds (we just use intermediate-bond funds), our Gold/Analyst Picks have returned 4 . 72% versus 4 . 64% for the Barclays U.S. Aggregate Bond Index. Our Gold/Analyst Picks are also ahead for five years, but a touch behind for three, which is consistent with what we’ve seen in the batting averages. Our municipal-national-bond fund Gold/Analyst Picks are a hair ahead of the Barclays Municipal Bond Index. They have returned 4 . 71% annualized versus 4 . 64% annualized for the muni index. That’s pretty good considering the index is cost-free and hard to replicate. Our Gold/Analyst Picks are also ahead over the trailing three- and five-year periods.

This month, instead of looking at individual funds, I am going to stand back and look at the big picture of Morningstar Analyst Rating performance. Each month at the top right of the facing page, we display the batting averages for Gold-rated funds over the trailing three-, five-, and 10 -year periods. We launched our Morningstar Medalist ratings in November 2011 , so for our five- and 10 -year figures, we use Analyst Picks, which were the predecessors to Gold-rated funds. The batting averages tell you what percentage of Gold/Analyst Pick funds outper- formed their peer groups during the time they were a Gold/Analyst Pick. We time-weight the figures so that a fund that was a Gold/Analyst Pick for 10 years counts for twice as much as one that was a Gold/Analyst Pick for five years. We show you the total percentage that outperformed and the percentage that finished in the top quartile. As you can see, our 10 -year track record is pretty strong. All asset classes have Gold-rated funds that outper- formed 70% of the time or more, with balanced funds doing best, achieving an 89% batting average. You can also see that more than 40% of Gold/Analyst Pick funds produced top-quartile performance for four out of five asset groups. For the trailing three- and five-year periods, there are two areas of disappointment. Only half the muni Gold-rated funds outperformed during the past five years and less than half of taxable-bond funds outperformed over the trailing three years. The main source of weakness has been that we favor conser- vative-bond funds, by and large, but those that take on a lot of risk have done quite well since 2008 . Another way of looking at performance is to create a hypothetical portfolio for each asset class, in which funds go into an equal-weighted portfolio when they

What Are Morningstar Analyst Ratings?

Our ratings are chosen for long- term success. Analysts assess a fund’s competitive advantages by analyzing people, process, parent, performance, and price. They do rigorous analysis and then submit their ratings to a committee that vets their work for thoroughness and consistency.

We don’t have a portfolio performance for allocation funds because they require multiple indexes. K