If you think future outperformance of top-rated Morningstar domestic equity funds will be 0.7% a year, as it was in the past, the after-tax return on index mutual funds will probably be higher, since the active funds trade and since some funds will lose their top rating, triggering further turnover. The 2.2% edge for top-rated foreign equity funds is larger and may justify investing in them even in a taxable account. In a tax-deferred account the case for a strategy of owning top-rated funds is stronger.
How Our Top-Rated Funds Have Performed
A portfolio approach to measuring our Morningstar Medalist performance.
By Russel Kinnel | 01-27-14
"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."
- posted 6 years ago