(PUB) Investing 2015

March 2015

Morningstar FundInvestor

3

tently outperform, and that meant investors didn’t get in too late.

place, and it keeps people from piling in at the worst time and then selling at the bottom.

Fidelity Tax-Free Bond FTABX , Loomis Sayles Investment Grade Bond LSIIX , and TCW Total Return Bond TGLMX produced outstanding investor returns relative to their peers. On the equity side, AlllianzGI NFJ Small-Cap Value PNVDX , Primecap Odyssey Stock POSKX , Primecap Odyssey Aggressive Growth, Fidelity Small Cap Discovery FSCRX , and Brown Capital Manage- ment Small Company BCSIX were standouts. Not only were they consistent winners, but they also all closed to new investors at one time or another. Closing to new investors works well in a couple of ways. It helps to preserve management’s ability to run the same strategy that had succeeded in the first

Take-Away The big improvement in investor returns is a happy accident of the markets, but the details provide a number of valuable lessons that we can apply to improve our own results. Focus on your plan, not the news. Market-timing is very difficult to do well, so stick to your plan and keep investing. Markets, after all, generally go up. Look for lower-risk funds. Funds with High Morning- star Risk ratings lead to lower returns and a wider gap. After a long-running bull market, this is probably more important than ever. Lower-risk funds may appear rather unappealing, but you may well hold on to these funds through the next downturn and sell the high-risk funds at the worst time. Find the right funds for you. If you have made a lot of fund trades over the years, maybe you need to dial down the volatility. Target-date funds are tremen- dously diversified and therefore kind of dull. But that’s a good thing. Dullness keeps emotions out of the equation, and it is emotional investing that wrecks a good plan. Target-date funds and balanced funds can help you steadily reach your goals. Look for funds and fund companies that close funds before they get too big. You can do this by finding funds that have closed in the past but have reopened, such as Perkins Small Cap Value JSCVX . In addi- tion, some funds will name a closing target well in advance so you can have some confidence that the fund won’t suffer asset bloat going in. Some firms like Primecap are particularly dependable at closing funds. Others like Dodge & Cox, Vanguard, and T. Rowe Price have closed funds, though not at particu- larly low asset levels. Low-cost funds should also be a key part of your strategy. They have higher returns and tend to even be less risky because they have a lower hurdle to overcome. œ

Risk and Investor Returns

Ast-Wgt 10-yr Investor Return %

Average 10-yr Total Return %

10-yr Return Gap %

Average Overall Morningstar Risk

Group

Risk Quartile

U.S. Diversified Funds 1

8.76

7.60

1.15

1.68

2

6.68

7.78

-1.11

2.25

3

7.27

7.40

-0.13

2.58

4

5.25

7.38

-2.13

3.13

Balanced

1

4.32

4.53

-0.22

0.41

2

6.65

5.38

1.26

0.78

3

4.96

5.52

-0.57

0.93

4

5.44

5.52

-0.08

1.34

Intl Equity Funds

1

7.24

6.45

0.79

1.71

2

3.83

5.49

-1.66

2.48

3

4.91

5.55

-0.64

2.95

4

4.10

5.85

-1.75

3.90

Taxable Bond

1

2.53

4.01

-1.48

0.10

2

3.02

4.03

-1.02

0.21

3

4.26

4.84

-0.58

0.34

4

3.78

4.46

-0.68

0.35

Municipal Bond

1

2.09

3.58

-1.49

0.14

2

2.65

3.84

-1.18

0.20

3

2.72

3.67

-0.95

0.19

4

1.76

3.53

-1.77

0.38

All Funds

1

6.56

5.30

1.26

0.84

2

5.88

5.91

-0.04

1.53

3

5.63

5.95

-0.32

1.90

4

4.53

5.84

-1.32

2.36

Data through Dec. 31, 2014.