China Region Leads New Category Rollout

Morningstar is rolling out three new categories.

When we decide whether a category should be created, we look for three things. First, we look for performance that's different from the existing categories. Second, we look for a measurable difference in portfolios. Third, we look for a critical mass of at least 20 funds--you'd be amazed how many fund types go from trendy to dumpster in a few years.

For a really deep dive on our categories, check out our methodology document on the subject.

With that in mind, we have created three categories that meet those tests. If you'd like to see each one in depth, go to our free fund screener tool or our premium screener tool and select the category you want. Then you can see all the funds in each category. (If you include a distinct portfolios screen, you'll pare it down further so that there's just one entry for each fund.)

China Region
Funds and individual investors alike continue to show more interest in playing the biggest emerging markets. There are 25 open-end and 17 ETFs in this new category. We define it as funds with at least 75% of their equity assets in China, Taiwan, and Hong Kong. As the group has grown, a number of approaches to regional exposure have been applied, and we captured most by including any of the three markets that are seen as plays on China.

The category boasts two funds with more than $1 billion:  Matthews China (MCHFX) and  Fidelity China Region (FHKCX). The Matthews fund and Templeton China World (TCWAX) and U.S. Global Investors China Region  each have managers with more than a decade at the helm. Fidelity China Region is the cheapest with an expense ratio of 1.03%. Matthews China has the best 10-year return, but don't expect anyone to repeat their 17% annualized 10-year return.

Market Neutral
We're carving our long-short group into two by pulling out the market neutral funds from those that can have more varied long-short exposure. Market neutral portfolios seek income while maintaining low correlation to fluctuations in market conditions. Market neutral portfolios typically have net equity exposure between -20% and 20% and a beta between -0.3 and 0.3. All told there are 29 open-end market neutral funds and no ETFs.

The group has five funds with more than $1 billion:  Arbitrage  (ARBFX), GMO Alpha Only III  ,  Merger  (MERFX), Highbridge Statistical Market Neutral , and  JPMorgan Research Market Neutral . James Market Neutral  and JPMorgan Research Market Neutral each have managers with at least a decade of experience. A different JP Morgan fund,  JPMorgan Multi-Cap Market Neutral  has the cheapest retail expense ratio at 1.49%.

The institutional GMO Alpha Only III tops the 10-year return table with 5.8% annualized.

Aggressive Allocation
Over the past few years, fund companies have been adding funds that land between the typical balanced fund mix of 60/40 and fully invested stock funds. It's now reached a critical mass of dedicated funds that we're creating a category to capture it. Specifically, we're defining it as funds with a slug of bonds and between 70% and 90% in stocks.

We tallied 34 funds that fit in our new group. Most are funds of funds that dial in their allocation through an in-house lineup of funds. Three are over $1 billion: Transamerica Asset Allocation Moderate Growth (IMLAX) ($3 billion), Thrivent Moderately Aggressive Allocation  (TMAAX) ($1.1 billion), and  RiverSource Strategic Allocation ($1 billion) (IMRFX).

 American Century Strategic Allocation (ACVAX) "boasts" the top 10-year return with a 2.3% annualized return. Technically, there are funds of funds with lower annual expense ratios, but when you used the prospectus net figure that rolls up underlying fees, you see that they are pricier. You can find prospectus net expense ratios on a fund's expenses tab.

Notes on Categories
If you're looking at a fund and wondering how we define its category, just scroll down to the bottom of the fund's data page.

Finally, I'll add that creating categories is not intended as an endorsement of the funds in the category. You wouldn't want to buy a fund from every category. Rather the categories are intended to make performance comparisons better, help investors in building portfolios, and make it easier to find the kind of funds you want.

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