Morningstar Advisor - October/November 2010 - 16

Investment Briefs

Analyst ‘Batting Average’ on the Rise
In Morningstar FundInvestor, editor Russel Kinnel tracks the “batting averages” of Morningstar’s Fund Analyst Picks. He recently reported that analysts’ fund-picking record has improved in four of five broad asset classes since 2007. The averages show what percentage of analysts’ picks have outperformed their peers over the trailing five years. The figure is weighted based upon how long a fund was a pick in that time period. In September, there were 192 Analyst Picks. Here are the results by asset class:

r believe target-date series would “We benefit from a more comprehensive set of disclosure guidelines from the Commission.” r “Easily accessible, intuitive graphics that illustrate how a fund’s asset allocation shifts over time should be required disclosure to individual investors because they’ll help tell a complex story.” r would be helpful to know ... a “It fund’s intended subasset class allocation within those broader asset classes. Two funds with identical equity-bond-cash allocations may have very different risk profiles.” r investors know how their target-date “If funds will be managed over the entire ownership period—as some of the above suggestions help facilitate—there’s less need to draw attention to one year over others through decades of investment. ... A major problem with target-date funds has been that investors assume that all funds with the 2010 or 2030 moniker will perform similarly. So, too, might they erroneously assume that funds with identical target-year allocations will perform alike.”

a long-term advantage, says Morningstar senior research and communications analyst Preethi Parmar. The past decade caused panic among investors, many of whom fled to the safety of gold. But $1 invested in the stock market beginning in 1980 would have grown to $24.37 by July 2010. That dollar invested in bonds over the same time period would be $18.20. And if $1 would have been put into gold in 1980? It would be a mere $2.23 today. What does history reveal about investing in gold versus the stock market? In the table below, Parmar lists the average annual returns of stocks, bonds, gold, a stockbond portfolio, and a diversified portfolio of stocks, bonds, and gold over different time periods. Over the past 20 and 30 years, stocks have provided higher average returns than has gold. In fact, even bonds fared better than gold in the long run. With gold prices at an all-time high and fear of a double-dip recession, investors may want to consider diversifying their portfolios to include a mix of stocks and bonds, as well as gold. Because these assets generally do not react identically to the same economic or market stimuli, combining them can often produce a more appealing risk-andreturn trade-off.

Analyst Pick Batting Averages
Asset Class 2010 Avg. 2007 Avg.

U.S,. Equity Balanced Municipal Bond Taxable Bond Intl Equity

64% 86% 96% 84% 62%

60% 80% 88% 63% 70%

Fund Analysts Pen Target-Date Letter to SEC
In August, Morningstar's Fund Research Group submitted a comment letter to the SEC urging the commission to require funds to take new steps aimed at helping investors better understand targetdate funds. Here are some excerpts from the letter: r “Given target-date funds' prominence in retirement portfolios, it's crucial that investors understand what they own, especially because target-date funds' approach to asset allocation is relatively new.”

Gold No Match for LongTerm Returns of Stocks
Gold has done well recently, but stocks carry

Stocks, Bond, and Gold
% Annual Returns 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs 30 Yrs

Stocks Bonds Gold 60% Stock, 40% Bond Portfolio 50% Stock, 30% Bond, 20% Gold Portfolio

13.8 12.0 24.5 13.8 16.2

–6.8 9.7 20.7 0.4 4.3

–0.2 6.5 22.2 3.1 6.9

–0.8 7.9 15.5 3.2 5.7

8.1 8.9 5.9 8.8 8.5

10.7 10.1 2.0 10.9 9.4

Data as of July 31, 2010. Stocks in this example are represented by the Standard & Poor’s 500, which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the 20-year U.S. government bond. Gold is represented by the Federal Reserve (2nd London fix) from 1980–1987 and Wall Street Journal London P.M. closing price thereafter. Portfolios are always rebalanced.

16 Morningstar Advisor October/November 2010

Morningstar Advisor - October/November 2010

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2010