A look back at our performance through the end of 2010
At Morningstar, we espouse the benefits of transparency in the investing world. For that reason, we do our best to provide an honest picture of our stock rating performance every quarter. We do so not only so you can judge the value of our research, but so that you can use the performance information to hone your own investment strategies.
How Did Our Investable Strategies Perform?
Morningstar's strategists manage several equity portfolios, with the results made transparent to investors through our newsletters. As experts in our stock rating methodology, they have keen insight on how to best use our equity research to achieve outsized returns. In addition, Morningstar created the Wide Moat Focus Index, which rebalances to hold the 20 cheapest wide moat stocks every quarter. The portfolios and our Wide Moat Focus Index are replicable strategies, and they represent easy and efficient ways to put our research in practice, each with slightly different goals, from income generation, to total return and low turnover. The performance of these investable strategies in 2010 was mixed, but year-to-date, and trailing 3- and 5-year returns for our investable strategies have all beaten the S&P 500.
How Did Our Rating System Perform?
Although our investable strategies represent efficient real-world application of Morningstar research, we find it illustrative to examine our rating system comprehensively.
Our average star rating buckets show the returns of hypothetical portfolios that rebalance all of the stocks with a given rating on a daily basis to equal weights. Because of this frequent rebalancing, it is spurious to compare these buckets to the S&P 500. It suffices to simply expect 5- and 4-star buckets to outperform the 2- and 1-star buckets over time.
During the trailing five-year period, these returns line up as we would hope except for our 1-stars. During the financial crisis, we believed the market to be significantly undervalued, and as a result had few 1-star stocks. This allowed each individual 1-star stock to have a greater effect on our 1-star bucket's performance. This increased influence, combined with some of our 1-stars returning from the brink of destruction, lead to outsized returns in the 1-star portfolio.
For additional information about our performance, we look to our median return buckets. These buckets chain weight the median returning stock with each rating from each day in a given time period. Although our median buckets are in no way replicable, they illustrate the performance of our buckets without the effect of outliers. Since these buckets line up better than our average buckets, we can say that while we get most stocks right, our covered stocks sometimes have large positive or negative returns that we did not predict.