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.
In this quarterly 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 that of 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 Sept. 30), as determined by the firm’s proprietary rating system. That system weighs returns against the risk a fund took, as implied by its volatility.
The 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.
In a bear market, “good” performance can be relative, of course. Here’s how the funds were ranked:
* First, each fund has an overall star ranking (5 stars is best, 1 is worst) based on its risk-adjusted performance versus its peers in 48 fund categories, as measured over several periods (three, five and 10 years, as applicable). This marks a recent change for Morningstar, which until midyear 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 that of 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 gained or lost stars at midyear. For example, in the large-cap growth category, American Funds’ Growth Fund of America gained a fifth star, as did 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 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 with 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.
Appearing after these four pages are listings of the 5,400 largest mutual funds, listed by family name from A to Z, with category type, rankings and performance data for each. Also listed are funds’ telephone numbers.
(A few late-reporting funds are not ranked.)
