Guide to Morningstar’s Top-Rated Funds
With more than 10,000 mutual funds to choose from, many investors cringe at the task of making selections.
With today’s special quarterly fund report, The Times and independent research firm Morningstar Inc. provide several ways to evaluate funds--including measurements designed to help investors determine a fund’s performance relative to its peers using Morningstar’s revamped “star” system.
The tables on the next several pages list the best-performing funds in each of Morningstar’s major fund categories over the last three years (ended June 28), as determined by the firm’s proprietary rating system. That three-year period includes the end of the bull market surge of 1999 and early 2000 as well as the bear market that began in March 2000. Only funds with three years of history are included.
Here’s how the funds were ranked:
* First, each fund has an overall star ranking (5 stars is best, followed by 4, etc.) based on its risk-adjusted performance versus its peers in 48 different fund categories, as measured over several time periods (three, five and 10 years, as applicable). This marks a major change for Morningstar, which until this quarter had based its star ratings on performance within a broad class of funds, such as domestic equity or municipal bond.
According to Morningstar, the new system is fairer because it measures a fund’s performance against others with the same investment goals. Now, funds are graded on a bell curve within each category, so the comparisons are “apples to apples,” according to Morningstar.
Under the new system, more than half of the funds in Morningstar’s universe have gained or lost stars. For example, in the large-cap growth category, American Funds’ Growth Fund of America has gained a fifth star, as has the large-cap blend fund Fidelity Growth & Income. Conversely, several small-cap value funds have lost stars.
* Second, within each overall rating score (i.e., first the 5s, then the 4s, etc.) funds are ranked by actual three-year performance within the category as a whole, expressed as a percentile figure (1 to 100, with 1 being best). That is the “three-year rank” column.
For funds with multiple classes (i.e., A and B shares, etc.) only the best-performing class is included.
To determine order, ties in the first two columns were broken by manager tenure.
* Next, a secondary, three-year star rating appears in the third column, assessing a fund’s performance based solely on the trailing three-year period, a span that many financial analysts use to get a quick snapshot of performance in recent years. The number of stars (again, on a scale of 1 through 5, with 5 being the best) is an assessment of performance and level of risk for that fund compared against its peer group: small-cap value, for example, or large-cap growth.
Funds that are less than 5 years old will have the same overall and three-year ratings, but older funds (whose overall ratings are based on a weighted average of the different periods) may have different three-year and overall star ratings.
A word about categories:
Morningstar does not categorize funds based solely on a fund’s self-description. Rather, it also looks at each fund’s actual holdings to determine category.
The largest groups of funds are domestic equity funds, which Morningstar organizes by the average size (market capitalization) of companies owned and by a fund’s general investment philosophy. These appear on the next page.
Want to see how other funds shape up? Appearing after these four pages are listings of the 4,500 largest mutual funds, listed by family name from A to Z, with category type, rankings and performance data for each. Also listed are funds’ phone numbers. (A few late-reporting funds are not ranked.)
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Morningstar Offers Broad Range of Mutual Fund Data
Mutual fund data in this section are based primarily on information from fund tracker Morningstar Inc.
Morningstar is a privately owned company founded in 1984 to provide investors with information from an independent source for use in making investment decisions. Its “star” rating system is used by financial planners, cited in advertisements and used as a guide by investors and the media.
As the Chicago-based company has grown, its staff of analysts, writers and programmers has introduced print and software products for individual and professional investors. These include the investor guides “Morningstar Mutual Funds”; “Morningstar FundInvestor”; “Morningstar StockInvestor”; the CD-ROM “Morningstar Principia Pro Plus for Mutual Funds, Closed-End Funds, Stocks, and Variable Annuities/Life”; and Morningstar’s Web site at www.morningstar.com.
To learn more about Morningstar and its products, call (800) 735-0700.
