(PUB) Morningstar FundInvestor

April 2014 Vol. 22 No. 8

FundInvestor Research and recommendatio s for the s riou fund investo

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What Does the Box Say?

Our Analyst Ratings are long-term ratings of a fund’s risk-adjusted prospects. We care about risk because investors fare much better with low- to moderate- risk funds, whereas they suffer poor timing in high- risk funds. In 2012 there was a similar, albeit less dramatic, challenge in muni bonds. Low-quality munis rallied dramatically in 2009 and kept on rallying through 2012 . As a result, many of our highest-rated muni funds were looking pretty lousy on a three- and five-year basis. We stayed with the likes of Fidelity and Vanguard, and, in 2013 , the market had a modest correction that made both firms look a lot better in the performance rankings. In U.S. equities, cautious funds have generally lagged. Holding cash or bonds tones down volatility, but it holds a fund back in rallies like 2013 . Funds favoring high-quality stocks likewise have been looking sluggish as those names tend to outperform in down markets or flagging economies. A handful of equity funds also hold some gold as a hedge against troubled times, but that has been a rather costly hedge in recent years. Not everything divides neatly into cautious and aggressive, though. Health care had a great run, but it’s somewhat defensive except for biotechnology. In addition, materials and mining stocks are rather high-risk and they’ve done poorly. In any case, it’s helpful to factor in all those market biases to figure out whether a fund is still a keeper. On Page 3 we have drawn a picture to illustrate my point. We took the equity funds in the Morningstar 500 and gave them each a dot to represent their

RusselKinnel, Director of FundResearch and Editor

Fund Reports

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Last year really rocked the investment world. We saw huge returns for U.S. equities and meager returns for emerging markets. Bond funds were hard-hit, too. But here I’ll focus on the five-year rally in U.S. stocks. Last year was such a big rally that it was enough to make or break a five-year record. With the 2008 bear market out of the five-year figures, the effect was magnified. Today, aggressive funds are once more at the top and cautious funds look woefully out of touch. I could have said the same thing in 2007 or 1999 . Those times you’d have done well to dump your aggressive funds because a bear market was on the way. Markets are rarely so tidy as to fit a pattern closely, but it is something to keep in mind when looking at returns, especially three- and five- year returns. Even for a period as long as five years, you can see pronounced biases in the market. The challenge for investors is to correctly account for that as well as the likelihood that those biases will reverse. I see the challenge every day in our Morningstar Analyst Ratings meetings. We thrash through the data to figure out what to really make of a fund’s five- year numbers. We don’t want to overreact to five-year figures, but we also want to give proper credit or blame—we’re not giving any free passes out.

Laudus US Large Cap Growth Vanguard Health Care Yacktman Focused

Morningstar Research

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Emerging Markets Working Against Foreign Funds

The Contrarian

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5 Great Funds for Your IRA

Red Flags

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Green Managers at the Helm

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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6 IRA Mistakes to Avoid

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

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