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Our Picks' Batting Average Is .675

An update of the performance of our Fund Analyst Picks.

Russel Kinnel, 09/17/2007

Our Fund Analyst Picks are the culmination of all our work analyzing 2,000 funds. They represent our picks for the best risk-adjusted long-term performance.

We select funds that have a competitive advantage, which gives them a good chance of long-term success. The process is driven by key fundamentals such as management, strategy, costs, stewardship, and long-term performance. Readers new to Morningstar are often surprised that our picks aren't based on short-term performance, but we (and many academics) have found that short-term performance has little predictive value.

You can find a listing of our Analyst Picks arranged by category every quarter in Morningstar Advisor magazine.

How the Picks Have Performed
Let's take a look at how our picks have performed against indexes and against category averages. Over the trailing five years ended Aug. 31, our domestic equity picks returned 14.07% versus 13.28% for the Wilshire 5000, 12.0% for the S&P 500, and 9.92% for our domestic equity pans. For this measurement, we included funds from the nine categories of the Morningstar Style Box (such as mid-value and large blend) but not sector funds or allocation funds.

Our foreign stock picks returned an annualized 20.67% over the past five years compared with 19.53% for MSCI EAFE, and 18.37% for our pans. In this case, we included the five foreign equity categories in the aggregate performance.

In bond funds, we narrowed the categories for benchmark comparison because when you move beyond the core categories, the benchmark comparison has little meaning. Thus, we're only comparing intermediate-bond funds with the Lehman Brothers Aggregate, and we're only comparing muni national long with the Lehman Muni Index. In addition, we didn't have pans over the entire period in either category, so we're not including the pans comparison.

Our taxable-bond picks earned a collective 4.94% versus 4.31% for the Lehman, and our muni picks earned 4.13% versus 4.16%.

Overall, I think these results are solid, particularly in the bond realm where every basis point counts. Even the munis result, where we lagged by 3 basis points, was quite good when you consider that the indexes come before expenses, so that a fund that did a perfect job of tracking the Lehman Muni Index before expenses of 40 basis points would have been 37 basis points behind our picks.

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