(PUB) Investing 2016

3

October 2 016

Morningstar FundInvestor

U.S. Open-End Mutual Funds (cont’d)

Take-Aways Needless to say, expense ratios are the place to start for mutual funds. We highlight funds whose expense ratios are in the cheapest quintile with a dark-blue bolding in the fund data pages. Look for funds with strong managers, good strategies, good stewardship, and good performance over the manager’s entire tenure, too. You want to understand past performance, but don’t read too much into recent returns. Cheap Funds in a Slump If you are looking for some contrarian bets in keeping with the findings of this study, I’ve pulled the Morningstar 500 funds that have a Morningstar Medalist rating, expenses ratios in the cheapest quartile of their category, and bottom-quartile five- year returns. They are ranked in order of fee ranking relative to peers. Vanguard FTSE All-World ex-US Sm Cap Idx VFSVX This fund is super cheap, with an expense ratio of 0 . 31% , but it looks like a dog because of emerging markets. The fund tracks an index with 23% in emerging markets, but the typical foreign small/mid- blend fund only has 4% there. Vanguard Short-Term Tax-Exempt VWSTX This Silver-rated fund charges just 0 . 20% , and its underperformance is purely due to its short duration. DFA Emerging Markets Value DFEVX This fund’s value tilt has held it back, but its 0 . 56% expense ratio may pull it ahead when its style is back in favor. FPA New Income FPNIX Tom Atteberry is very cautious, and he consistently has less interest-rate risk and less credit risk than his peers, so this is another one that will lag in rallies. It charges a modest 0 . 58% . Perkins Mid Cap Value JMCVX This fund’s slump owes to caution, but its longer-term record is strong and 0 . 59% is a great expense ratio. An emphasis on cheap but lower-yielding stocks has put the fund distinctly out of favor. K

Taxable Bond (cont’d)

Expense Quartile

Avg Exp Ratio (%)

5-Yr Return Quartile

Avg 5-Yr Return (%)

Funds With 5-Yr Return

Avg Subsequent 10-Yr Rating

Avg Subsequent 10-Yr Return (%)

10-Yr Success Ratio

3

1.22

4 3 2 1 4 3 2 1

4.61 5.26 5.85 7.26 3.81 5.67 6.65 8.08

126 118 101

2.37 2.64 2.81 2.93 2.00 2.62 2.56 1.83

3.86 3.95 4.09 4.35 3.21 3.98 4.22 3.77

17.46 25.42 37.62 39.02 27.55 12.50 13.33 9.26

82

4

1.77

216

98 56 45

Municipal Bond

Expense Quartile

Avg Exp Ratio (%)

5-Yr Return Quartile

Avg 5-Yr Return (%)

Funds With 5-Yr Return

Avg Subsequent 10-Yr Rating

Avg Subsequent 10-Yr Return (%)

10-Yr Success Ratio

1

0.59

4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1

3.53 4.27 4.79 5.47 3.67 4.44 4.85 5.37 3.78 4.38 4.66 5.34 3.71 4.36 4.91 6.10 0.18 2.71 4.62 7.69 0.44 3.39 4.67 7.74 0.98 3.10 4.45 7.90 0.41 2.92 4.56 8.02

26 69

2.54 3.07 3.52 3.79 2.41 2.78 2.99 3.11 1.98 2.27 2.38 2.59 1.67 1.97 1.73 1.43 3.17 3.19 3.30 3.40 2.92 2.83 2.92 3.00 2.49 2.60 2.75 2.73 2.28 2.53 2.65 2.21

3.42 3.71 4.13 4.23 3.61 3.90 4.06 4.09 3.51 3.57 3.64 3.45 3.22 3.22 2.95 2.99 5.58 5.65 5.43 5.38 5.20 4.93 5.22 5.32 4.50 4.64 4.82 4.85 4.08 4.48 4.88 4.37

19.23 39.13 55.00 59.57 17.78 25.00 40.16 49.17 12.10 22.22 31.71 1.93 2.35 0.00 0.00 33.77 41.20 48.67 57.78 22.48 28.29 37.47 43.46 16.91 19.60 27.98 32.50 9.45

120 188

2

0.85

45

128 122 120 127 124

3

1.29

99 41

4

1.67

207

85 35 21

All Mutual Funds

Expense Quartile

Avg Exp Ratio (%)

5-Yr Return Quartile

Avg 5-Yr Return (%)

Funds With 5-Yr Return

Avg Subsequent 10-Yr Rating

Avg Subsequent 10-Yr Return (%)

10-Yr Success Ratio

1

0.70

302 602 863 919 476 661 726 780 686 643 554 480 624 398 320

2

1.07

3

1.48

8.37

4

2.06

1111

12.98 19.10 15.00