How Our Top-Rated Funds Have Performed
A portfolio approach to measuring our Morningstar Medalist performance.
A portfolio approach to measuring our Morningstar Medalist performance.
Each month in Morningstar FundInvestor, I share our batting averages with you. Batting averages tell you what percentage of our highest-rated funds outperformed their peer groups.
We measure the performance during the time the fund had a Morningstar Analyst Rating of Gold (or had a Fund Analyst Pick designation prior to November 2011), and we see whether it outperformed over that period. Then we weight that answer depending on how long the fund had our top rating. This gives you a sense of the chances you'd have gotten a fund that outperforms if you had used our ratings. It can inform your idea of the likelihood of future outperformance, too, but of course there's no guarantee that past performance will be repeated.
Batting averages are helpful, but it's also worth tracking the degree of outperformance or underperformance. If you bought a few top-rated funds, would they have cumulatively beaten their benchmarks? Do our top-rated funds tend to outperform by a little or a lot? Of those that underperform, do they do so by a little or a lot? To get a handle on that question, we create portfolios of our top-rated funds and compare them with broad benchmarks. When a fund's rating is lowered, it gets kicked out, and when it is raised to the top level, it gets added. Let's take a look at 10-year results through the end of 2013 using both approaches.
Our top-rated U.S. equity funds returned a cumulative 8.1% annualized over the trailing 10-year period ended Dec. 31, 2013, compared with a 7.4% return for the S&P 500 and 8.0% for the Wilshire 5000. From the batting-average side, we saw 68% of funds outperform their peer group and 51% hit the top quartile. For foreign equities, our top-rated funds returned an annualized 9.1% versus 6.9% for the MSCI EAFE over the past 10 years. The batting average was 79% outperforming and 58% in the top quartile. We don't have a single benchmark that's good enough for allocation funds, but we do have batting averages. Our allocation funds outperformed 92% of the time over the past 10 years, and 65% finished in the top quartile.
For bonds, we limit our total-return test to single categories because the performance varies too much to compare a broad group of funds with a single benchmark. So, for taxable bonds, we compare intermediate-bond funds to the Barclays U.S. Aggregate Bond Index. There, our top-rated funds returned 5.2% annualized versus 4.3% for the index. Our batting average is calculated across all bond-fund categories, and there we saw 85% of our taxable-bond fund Gold/Analyst Pick funds beat their peers. In addition, 78% finished in the top quartile of their group. For municipals, we compare the muni national long category against the Barclays Municipal Index.
The cumulative return for our top-rated funds matched the 4.3% of the index. On a batting-average basis, 95% beat their peers and 78% finished in the top quartile. (We plan to share more details on how our Medalists have performed, but in the meantime, you can track them here.)
Note on Index Funds
We rate index funds, too, and include them in the batting averages, but we do not include the portfolio versus benchmark figures because of course they lag their benchmarks by a small amount. You don't expect an index fund to beat its benchmark. That said, including them would have very little impact on the return figures given how close they are to the benchmark. On the other hand, the batting average is a good test, as you want an index fund that beats its peer group.
For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.
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