(By Russel Kinnel and Dan Culloton) 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 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.
The cumulative foreign-stock style box category Gold/picks have returned 9.6% annualized compared with 7.7% for the MSCI EAFE over the past 10 years. For the past five years, foreign-stock funds lost 3.6% annualized versus a loss of 5.8% for the benchmark.
Our intermediate-term bond Gold/picks have 6.3% annualized returns over the past 10 years versus 5.4% for the Barclays Aggregate. For the past five years it's a 7.2% return for our favorites, versus a 6.4% gain for the index.
Our muni-national long Gold/picks returned 5.3% annualized for the past 10 years and 5.2% for the Barclays Muni. For the trailing five years, our top funds have a 5.9% return versus 6.0% for the index.
- source: Morningstar Analysts
The Past Year
We can also share the rather limited data we have so far on all ratings classes since our launch last year. Using funds that were in the initial launch on Nov. 15, 2011, and assuming they didn't change since then, we see positive signs but it is still pretty noisy. That's particularly true for Negative-rated funds as only 12 such funds were in the launch. Today there are 67 Negative-rated funds.
Comparing all rated funds versus their appropriate category benchmark--such as the Russell 2000 Growth for small-cap growth funds--we see that 54% of Gold funds beat their benchmark through Nov. 15, 2012, while 55% of Silver beat the category benchmark, 53% of Bronze funds beat the category benchmark, 47% of Neutral funds beat an appropriate category benchmark, and 58% of Negative-rated funds beat the secondary benchmark.
Comparing funds with the primary asset-class benchmark--the S&P 500 for U.S. stocks, MSCI EAFE Index for foreign equity, Barclays U.S. Aggregate Bond for taxable bonds, and the Barclays Municipal Index for munis--we see 50% of Gold-rated funds beat the primary benchmark, while 63% of Silver beat the benchmark, 47% of Bronze-rated funds beat the primary benchmark, 45% of Neutral-rated funds beat the benchmark, and 17% of Negative-rated funds beat the benchmark.
- source: Morningstar Analysts