Morningstar Advisor - April/May 2010 - 20

Investment Briefs

Top Wealth Creators and Destroyers
Total returns are the traditional, and best, measure of a mutual fund’s performance. But it can be telling to translate returns into hard dollars, particularly when the amounts at stake are huge. This way, investors can see which strategies are working, particularly on a large scale, and which are not. Open-end mutual fund firms manage more than $7 trillion in assets for U.S. investors (exclusive of money market funds and exchange-traded funds), but how much money have funds made for their shareholders? To answer that question, Sonya Morris, associate director of fund analysis for institutional products at Morningstar, calculated the total wealth created and destroyed during the course of the decade by focusing on

asset growth that wasn’t the result of fund flows. The calculation began with total net assets at the end of 1999. Cash flows over the decade were subtracted, and then total net assets at the end of 2009 were deducted. Results were computed for Morningstar fund categories and the largest 50 funds firms (as measured by total net mutual fund assets). Both existing and extinct funds were included in the calculation, because both contributed to the industry’s results during the decade. That’s another advantage that dollar totals have— they let investors see which firms and categories have lost money even if they later merge their mistakes away. The tables below present the top wealth creators and worst wealth destroyers during the decade, along with the asset-weighted returns during that period.

Buy the Unloved, 2010 Style
Since 1994, Morningstar has tracked a strategy named “buy the unloved,” which suggests investing in funds from the three most heavily redeemed equity categories from the past 12 months. From 1994 through 2009, the strategy produced an annualized 8.1% return, compared with 6.24% for the S&P 500, 6.96% for the Wilshire 5000, and 5.36% for the MSCI World. To implement the strategy, an investor buys funds from the three most unloved equity categories and does so again the next year and the year after that. In the year after accumulating three batches of unloved categories, the investor rolls money from the first batch into a new batch so that the holding period is three years. In the January issue of Morningstar FundInvestor, Russel Kinnel looked at the newest additions to the ranks of the unloved. Based on the 12-month flows through the end of January, the unloved categories to buy now are large-cap growth, large-cap value, and world stock. Kinnel, director of mutual fund research with Morningstar, listed some of his favorite funds to play the unloved strategy. Among large-growth funds, Primecap Odyssey Growth POGRX is one of the best fundamentalsdriven growth funds around, Kinnel says. The managers have built an outstanding track record by focusing on what a business is worth rather than growth rates or quarterly expectations. One catch is that investors have to either invest directly or pay a fee to buy it through Vanguard. For large-cap value, the most contrarian plays are dividend-focused funds. Thus, Kinnel suggests taking a look at T. Rowe Price Equity Income PRFDX and American Funds Washington Mutual AWSHX; the latter has seen more outflows than any other fund in 2009. In world stock, Kinnel says that Dodge & Cox Global Stock DODWX is a nice choice. It’s a low-cost combination of the strategies of Dodge & Cox Stock DODGX and Dodge & Cox

Top Wealth Creators
Category Wealth Created ($mil) Fund Firm Wealth Created ($mil)

Intermediate-Term Bond Large Blend Moderate Allocation Large Value Foreign Large Blend
Source: Morningstar Direct Fund Flows

192,611 144,053 124,654 116,729 62,884

American Funds Vanguard Fidelity Franklin Templeton PIMCO

190,953 188,959 153,082 78,442 71,381

Biggest Wealth Destroyers
Category Wealth Destroyed ($mil) Fund Firm Wealth Destroyed ($mil)

Large Growth Technology Europe Stock Diversified Pacific/Asia Mid-Cap Growth
Source: Morningstar Direct Fund Flows

–107.579 –62,805 –12,738 –5,332 –3,869

Janus Putnam AllianceBernstein Invesco AIM MFS

–58,397 –46,407 –11,376 –10.081 –7,651

20 Morningstar Advisor April/May 2010
Morningstar Advisor - April/May 2010

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2010
