Morningstar Advisor - April/May 2013 - (Page 62)

Gray Matters Meanwhile, taxable-bond funds had a smaller gap and bigger 10-year returns than munis did, as investors have had a steady love affair with taxable bonds for most of the past decade. Here, the average fund returned 5.63% and the average investor earned 4.76%. Morningstar Advisor Magazine—Don’t Miss an Issue! Subscribe for FREE today! Call +1 888 235-0828 or visit MorningstarAdvisor.com Reach the advisor audience. Reserve your ad space today: June/July 2013: Alternatives Investing: In a low-return, high-volatility world, investors must seek new types of investments to squeak out a couple more percentage points of real return. Our alternatives-analyst team will guide advisors as they venture beyond traditional stock/bond portfolios to construct strategies that are uncorrelated with standard asset classes. Ad Close: Apr. 19, 2013 Materials Due: May 3, 2013 For more information, contact: Mary Uribe, Mary.Uribe@morningstar. com, +1 312 384-3811 Online media kit: www.morningstar.com/aboutus/ mediakit.html 62 Morningstar Advisor April/May 2013 As investors were buying bond funds, they were selling U.S. equities. The average 10-year annualized return for U.S. stock funds was 7.89% versus 6.88% for the average investor return. Investors bailed on equities and bought bonds for much of the time after 2008, but of course, equities had better returns. Balanced funds produced solid results. There, a 6.37% gain for the typical balanced fund became a 5.53% gain for the average investor. Balanced funds tend to score well on this measure because they smooth out the highs and lows. They also have the benefit of including target-date funds where 401(k) flows are very steady. Finally, we come to the stars of the show. Sector funds had the highest 10-year investor returns at 9.07% versus 9.44% for the average sector fund. Sector funds were redeemed just like U.S. equity funds in 2008, but investors came back strong in the ensuing years and were able to participate in much of the gains. The bulk of those flows came in commodities: $11 billion of inflows went into commodity funds in 2009, $15 billion in 2010, and $10 billion in 2011. Not perfect timing, but not bad, either. By contrast, technology and health-care funds have had steady redemptions but not enough to counterbalance that in commodities. Thus, you see good timing in a fairly volatile area. The data has a way of being untidy, but I still think we’re on firm ground when we say that volatility is more challenging for investors. If you look at individual fund or category details, you can always find exceptions to the rule. While their asset-class timing is usually poor, investors are bound to make some decent timing moves. Narrow the Gap Aggregate investor return numbers can be more interesting than individual fund investor returns. For a single fund, all sorts of circumstances come into play, such as when the fund was launched. Looking at the bigger picture, the reasons why investors have lagged funds’ stated returns become more evident. Advisors and investors can see how others erred. Armed with this knowledge, they can take steps to guard against making investment decisions based on emotions and instead stick to their plans. K Russel Kinnel is director of mutual fund research with Morningstar and the editor of Morningstar FundInvestor. http://www.MorningstarAdvisor.com http://www.morningstar.com/aboutus/mediakit.html

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2013

Morningstar Advisor - April/May 2013
Contents
Contributors
Letter From the Editor
The Pursuit of Happiness and Financial Advice
What Strategies Do You Use to Control Risk?
Driven to Succeed for Clients and Family
How to Assess a Portfolio’s Bond Risk
Luck, Skill, and Investing
Investments á la Carte
Investment Briefs
Investing’s No- Brainers Have Costs
A Defensive Ride
Risk On/On Risk
The Risk of Being Overconfident
Year of Living Dangerously
The Risk-Parity Approach
A Guide to Mutual Funds Running Risk-Parity Strategies
What Moats Tell Us About Risk
Risk’s Wake-Up Call
Seeing Is Believing
Why Investors Lag the Returns of Their Funds
Liquidity Signals
Pump Them Up
Golden Oldies Keep on Truckin’
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Our Social Blind Spot

Morningstar Advisor - April/May 2013