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Fund Spy

Narrowing the Gap

Can the new Morningstar Analyst Ratings help investors pocket a bigger share of funds' gains?

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The new Morningstar Analyst Ratings and Global Fund Reports are designed to help all investors--individuals, institutions, advisors, retirement plan administrators, and other gatekeepers--use funds more effectively. Individual and institutional investors alike often pile into a fund after it posts huge gains and head for the exits when a fund hits the skids, thus locking in losses. As we've written about before, there's often a wide gap between a fund's total returns and its Morningstar Investor Returns, which factor in inflows and outflows. This gap suggests that investors are leaving a big chunk of funds' gains on the table. The gap is often wider for funds whose performance is volatile, suggesting that investors may not have understood a fund's risks when they bought the fund or may not have had reasonable expectations for the fund's performance in certain market conditions.

The Morningstar Analyst Ratings can help improve investors' results by helping them understand and set reasonable expectations for their funds. A good overall rating and positive People and Process scores might help investors stick with a slumping fund and capture its rebound and long-term gains. A poor rating can help others resist the temptation to chase a fund on an unsustainable hot streak. Below we profile a few funds where the difference between the fund's annualized total return and investor return (here called the "Returns Gap") is wide enough to drive a truck through. Ideally, over time these are the kinds of situations in which the Morningstar Analyst Ratings can help.

Michael Herbst does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.