(PUB) Morningstar FundInvestor

September 2013 Vol. 22 No. 1

FundInvestor Research and recommendatio s for the s riou fund investo

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15 Years of Funds and Investors

15 -year period, few of them earn the exact same return as the fund’s stated return.

Investor returns use fund flows to adjust returns so that periods when more investors hold the fund carry greater weight. Across the fund world the typ- ical investor falls about 0 . 92% per year short of stated fund total returns. The gap between investor returns and total returns essentially tells you how well investors timed their investments. Both the abso- lute investor-return figure and the gap are useful information. The more important figure, though, is the investor return as that tells how investors actually fared. A small gap isn’t much consolation if the total return and investor return are meager. You can find a fund’s investor returns on the FundInvestor 500 tab of our website mfi.morningstar.com . All this comes with a caveat. Because timing is so im- portant to investor returns, there is some luck in- volved. A fund launched near the bottom of the market might get inflows just as the markets are turning up. That’s great, but of course a fund only launches once. So, some funds that did exceptionally well had some lucky breaks. There are some valuable prin- ciples to glean from the big picture, however. Themes While you can see some categories repeated among the top and bottom funds, the next 15 -year returns might not match them. The greater lesson here is which kind of funds work well and which ones don’t. Volatility and extreme returns lead to bad results because they mean the correction to a rally will likely be more severe. Funds with huge three-year returns should spark as much concern as excitement. Continued on Page 3

RusselKinnel, Director of FundResearch and Editor

Fund Reports

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It’s great to have the 2000 – 02 bear market so far in the rearview. One of the strangest bear markets, it crushed tech and other large-growth stocks while leaving bonds and even a lot of equities outside of large growth unscathed. Those of us who stayed diversified rather than jumping on the tech band- wagon had a relatively easy go of it, though it was still very stressful to live through. Vanguard Wellington VWELX , for instance, deliv- ered a solid 5 . 8% 15 -year investor return thanks to a prudent investment style, low costs, and no surprises. So, it was quite different from the 2007 – 09 bear market, which crushed almost everything but was especially hard on large value—the home of big banks and insurers. This is why I find 15 -year total returns and 15 -year Morningstar Investor Returns so enlightening. They capture the craziest part of the dot-com bubble and the brutal bursting of the bubble that followed. Those few years perfectly il- lustrated the notion that markets tend to overdo things in both directions. I’ve run the total returns and investor returns for the Morningstar 500 funds, and I’ll highlight those with the best and worst 15 -year investor returns. Investor returns are an estimate of the returns a fund’s share- holders actually received. Because only a minority of investors hold a fund’s shares for an entire 10 - or

Dodge & Cox International FMI Focus Vanguard Health Care

Morningstar Research A Tough Challenge for Allocation Funds

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The Contrarian

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Good Bets for Strong Investor Returns

Red Flags

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Funds That Whiffed on a Fat Pitch

Market Overview

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Leaders & Laggards

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Manager Changes and News

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Portfolio Matters

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Testing the Bucket Approach to Retirement

Tracking Morningstar

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Analyst Ratings

Income Strategist

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FundInvestor 500

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FundInvestor 500 Spotlight

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Follow Russ on Twitter @RussKinnel