18
Each month we share our batting averages with
you. This month I’ll share a second way we
look at the performance of our Morningstar Analyst
Ratings alongside our long-term batting
average figures.
Batting averages tell you what percentage of our
highest-rated funds outperformed their peer groups.
We measure the performance over the time during
which the fund was rated Gold (or a Fund Analyst Pick
prior to November
2011
), and we see whether it
outperformed over that period. Then we weight that
answer depending on how long the fund had our top
rating. This gives you a sense of what the chances
are that you’d have gotten a fund that outperforms if
you had used our ratings. It can inform your idea of
likelihood of future outperformance, too, but of course
there’s no guarantee that past performance will
be repeated.
Batting averages are helpful, but it’s also worth
tracking the degree of outperformance or underperfor-
mance. If you bought a few top-rated funds, would
they have cumulatively beaten their benchmarks? Do
our top-rated funds tend to outperform by a little or
a lot? Of those that underperform, do they do so by a
little or a lot? To get a handle on that question, we
create portfolios of our top-rated funds and compare
them with broad benchmarks. When a fund’s rating
is lowered, it gets kicked out, and when it is raised to
the top level, it gets added. Let’s take a look at
10
-
year results through the end of
2013
using
both approaches.
Our top-rated U.S. equity funds returned a cumulative
8
.
1%
annualized over the trailing
10
-year period
ended Dec.
31
,
2013
, compared with a
7
.
4%
return for
the S
&
P
500
and
8
.
0%
for the Wilshire
5000
. From
the batting-average side, we saw
68%
of funds out-
perform their peer group and
51%
hit the top quartile.
For foreign equities, our top-rated funds returned an
annualized
9
.
1%
versus
6
.
9%
for the
MSCI
EAFE
over the past
10
years. The batting average was
79%
outperforming and
58%
in the top quartile.
We don’t have a single benchmark that’s good enough
for allocation funds, but we do have batting aver-
ages. Our allocation funds outperformed
92%
of the
time over the past
10
years, and
65%
finished in the
top quartile.
For bonds, we limit our total return test to single
categories because the performance varies too much
to compare a broad group of funds with a single
benchmark. So, for taxable bonds, we compare inter-
mediate-bond funds to the Barclays U.S. Aggregate
Bond Index. There, our top-rated funds returned
5
.
2%
annualized versus
4
.
3%
for the index. Our batting
average is calculated across all bond fund categories,
and there we saw
85%
of our taxable-bond fund
Gold/Analyst Pick funds beat their peers. In addition,
78%
finished in the top quartile of their group.
For municipals, we compare the muni national long
category against the Barclays Municipal Index. The
cumulative return for our top-rated funds matched the
4
.
3%
of the index. On a batting-average basis,
95%
beat their peers and
78%
finished in the top quartile.
(We plan to share more details on how our Medalists
have performed, but in the meantime, you can track
them here:
.)
Note on Index Funds
We rate index funds, too, and include them in the
batting averages, but we do not include the portfolio
versus benchmark figures because of course they
lag their benchmarks by a small amount. You don’t
expect an index fund to beat its benchmark. That
said, including them would have very little impact on
the return figures given how close they are to the
benchmark. On the other hand, the batting average is
a good test, as you want an index fund that beats
its peer group.
œ
How Our Medalists Have Performed
the Past 10 Years
Tracking Morningstar Analyst Ratings
|
Russel Kinnel
What Are Morningstar
Analyst Ratings?
Our ratings are chosen for long-
term success. Analysts assess
a fund’s competitive advantages
by analyzing people, process,
parent, performance, and price.
They do rigorous analysis and
then submit their ratings to a
committee that vets their work
for thoroughness and consistency.
