(PUB) Morningstar FundInvestor

May 2 014

Morningstar FundInvestor

3

Top Bargains in Core Categories

Looking for a great low-cost fund? I’ve gathered some of the cheapest active and passive funds. These ought to be your defaults when shopping for funds. If you pay more, make sure that you’re confident you’ve improved on these funds. For muni bonds I chose Van- guard Long-Term Tax-Exempt as the closest thing to an index fund as there are virtually no index funds and this fund keeps active bets to a minimum.

Total Ret % Rank Cat 1 Yr (Daily)

Total Ret % Rank Cat 3 Yr (Daily)

Total Ret % Rank Cat 5 Yr (Daily)

Total Ret % Rank Cat 10 Yr (Daily)

Total Ret % Rank Cat 15 Yr (Daily)

Prospectus Net Expense Ratio %

Morningstar Analyst Rating

Morningstar Category

Name

Ticker

Vanguard Tax-Mngd Bal Vanguard Wellesley Inc Vanguard Dev Mrkts Idx Dodge & Cox Intl Stock Vanguard Intrm-Trm Bd Idx

VTMFX VWINX VTMGX DODFX DODIX VTSAX VDIGX VIGAX VPCCX VBILX

Conserv Alloc Conserv Alloc Foreign Lg Blnd Foreign Lg Blnd Interm-Trm Bnd Interm-Trm Bnd Large Blend Large Blend Large Growth Large Growth

3

4 5

20 14 36 44 29 12 48 20 25 25 10 18 92 33 17 55 54 60 5

12

30

0.12 0.25 0.09 0.64 0.10 0.43 0.05 0.29 0.10 0.50 0.10 0.30 0.10 1.04 0.09 0.26 0.20 0.46 0.30 0.65

Œ Œ Œ Œ Œ Œ Œ „ Œ „ „ Œ Œ Œ Œ „ Œ „ Œ

32 27

6

7

20

38

1

7

7

94

12 23 23 14 16 10 26 25 66 13 43 49 63 11 3 7

14 18 16

Dodge & Cox Income

6

14

Vanguard Tot Stck Mkt Idx Vanguard Dividend Growth

31 77 58 28 36 70 30 87 40 24

5

Vanguard Growth Index

34

Vanguard PRIMECAP Core

Vanguard Value Index

VVIAX VEIPX

Large Value Large Value

28

Vanguard Equity-Income

8

28 77 34

Fidelity Spartan Extnd Mkt Idx FSEMX

Mid-Cap Blend Mid-Cap Blend

11 61 15

Osterweis

OSTFX VBIAX VWELX VWLTX

Vanguard Balanced Index

Mod Alloc Mod Alloc

Vanguard Wellington

4

7

Vanguard Lng-Trm Tax-Exempt Fidelity Municipal Income Vanguard Total Wrld Stck Dodge & Cox Global Stock

Muni Natl Long Muni Natl Long

6 9

22 17

12

FHIGX

3

VTWSX DODWX

World Stock World Stock

54

4

6

continued toward the end of the year so that the growth in assets wasn’t fully captured by 2013 ’s figures, which capture the 12 months ended Oct- ober 2013 . What’s Driving Lower Fees? Asset growth is by far the biggest driver, as funds typically have breakpoints set to automatically lower fees as assets grow. And the largest part of asset growth will usually be market performance, as in 2013 . However, a second component is fund flows. Fund investors have become smarter about buying cheaper funds. Last year, 95% of net inflows went into funds that ranked in the cheapest quintile of their category peers. The two years prior it was actually greater than 100% because you had money going out of pricier funds even as it was rushing into cheaper funds. In the 1990 s, investors were less choosy about fees. Only 56% of net inflows went into the cheapest quintile. As I laid out above, low costs lead to supe-

rior returns, so no doubt some of the money going into low-cost funds also reflects investors following performance as well as expenses. Where Are the Best Low-Cost Funds? Last month I looked at funds where fees had fallen the most. But those funds are not likely to be the cheapest, as a truly cheap fund isn’t likely to be able to make huge cuts. If you really want to enjoy the power of low costs, I’d suggest investing in some of the cheapest funds with Morningstar Analyst Ratings of Gold. I’ve gathered a list of low-cost Gold-rated funds and selected one passive and one active for each of the selected categories. It should be a handy shopping list for you. In some cases I chose a Silver-rated fund if a cheap Gold fund wasn’t available. I find it helpful to make it a goal to lower my portfo- lio’s overall expense ratio each year as I annually select where to put money. So, if you put some money in a fund with average expenses, put even more in a fund with cheapest-quintile fees. œ