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How Our Medalist Funds Have Performed

To mark the one-year anniversary of the Morningstar Analyst Rating for Funds, we look at how they've done so far.

Russel Kinnel and Daniel Culloton, 11/19/2012

Has it been a year already?

A year ago we launched our Morningstar Analyst Ratings for Funds. Moving from picks and pans, we adopted a five-tiered medal system with Gold ratings at the top, then Silver, Bronze, Neutral, and Negative. These medals are based on our view of a fund's long-term prospects for strong risk-adjusted performance. Essentially we are looking for funds with more competitive advantages than disadvantages. If the advantages and disadvantages cancel each other out, then we’ll likely rate a fund Neutral. If the disadvantages  outweigh the advantages, we may rate it Negative.

To mark the analyst ratings’ one-year anniversary we’ll take a look at their record since their launch. Because one-year is too-short a time period for a definitive judgment, we’ll also look at our analysts’ recommendations' longer-term results, treating our former Fund Analyst Picks like Gold-rated funds.

The Long Term 
Let’s start with our long-term batting averages. This one is pretty simple. We want to know what your chances of outperformance would have been had you purchased an analyst pick or Gold-rated fund. So we determine which funds outperform or underperform and then weight that based on the amount of time they were picks or Gold funds.

Through the end of October 2012, 66% of our top U.S. stock funds outperformed over the past 10 years, while 69% outperformed over the trailing five years. For taxable-bond funds, 84% have outperformed over the past 10 years, while 88% have outperformed over the past five years. For municipal-bond funds, 94% of our gold/picks outperformed over the past 10 years and 90% outperformed in the past five years.

International-stock picks/Gold outperformed 73% of the time over the past 10 years and 75% over the past five years. Balanced funds outperformed 89% over the past 10 years and 87% over the past five years.


  - source: Morningstar Analysts

Versus the Index  
Batting averages tell you about your chances of success, but they don’t tell you the degree of out- or underperformance, so we also calculate a portfolio level return that we compare with benchmarks. For U.S. equity, our top-rated U.S. Morningstar Style Box category funds (which includes top-rated passive funds that aim to track but not beat their indexes) have produced an annualized return of 8.0% compared with 6.9% for the S&P 500 Index over the trailing 10 years ended Oct. 31, 2012. For the trailing five years ending in October, they are a hair behind the S&P 500 with a small 0.3% gain compared with 0.4% for the benchmark.

Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please. Follow Russel on Twitter: @russkinnel.
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