Morningstar Advisor - February/March 2013 - (Page 7)

Letter From the Editor The Goal Matters More The monumental move by investors into passive vehicles from active funds certainly makes sense. There are many good reasons for investors to buy passive investments—costs, transparency, and tax management are among them. Then, you see statements such as “active funds consistently The point is, as Phillips and Morningstar’s passive- and active-fund analysts have long argued, one way is not inherently superior to the other. Getting caught up in this us-against-them debate will do investors more harm than good. You might make a sound decision that it is in your and your clients’ best interests to use only index funds. You might decide to use only active managers. But to base your decision on blanket statements that Active Passive Winner Average Active Fund Blend Value 7.73 Large 9.49 Mid 7.57 10.28 7.74 7.59 9.53 9.00 9.48 10.18 7.93 9.43 9.83 9.08 Small Growth 7.26 7.74 9.58 10.08 Average Active Morningstar 500 Fund Value Blend 8.18 Growth 8.35 7.74 Large We’re going old school with the topic of this issue: active investing. You remember the days of the star active manager, the skippers who excited us as they beat their benchmarks year after year? They were the ones who, after giving their keynote address at the Morningstar Investment Conference, would be surrounded by admiring media and attendees, pushing and shoving, eager to get more information about how they invest. There are still great active managers around—Oakmark’s Bill Nygren, for one, who is the subject of our Morningstar Conversation (Page 48)—but the bright lights are now focused on other, hotter subjects: indexers, passive-investing strategies, and providers of exchangetraded funds. Is there anyone more unhip right now than an active mutual fund manager not named Jeffrey Gundlach or Bill Gross? But that is simply not true, as the accompanying exhibit shows. The graphic compares the 10-year returns of active funds against those of index funds in each category of the Morningstar Style Box. The active fund average is shown in the upper left-hand side of each square, and the average index fund is in the lower right. The first style box simply lists the returns of the average active fund. In only three of the nine style-box categories did the average active fund beat the index fund. However, as analyst Daniel Culloton asks in his article “Yes, There Are Good Active Funds” (Page 36), why would you settle for average? In the second style box, we narrowed the universe to the active funds in the Morningstar 500, the best and most notable funds in the industry. Morningstar 500 active funds won in eight of the nine style-box categories. Culloton explores these results in his article. Don Phillips, in his column, offers more data to show how investors can take simple steps to narrow the universe of funds to high-quality offerings to greatly increase their chances of outperforming index funds (“A Twisted Debate,” Page 80). Active U.S. Diversified Equity Funds vs. the Average Index Fund Rival (10 Years) 10.64 7.57 Mid Follow Jerry on Twitter @ jerrykerns fail to beat benchmarks” and “why active investing is a losing bet,” and passive investing seems like a slam dunk. No active manager can possibly beat the market. 11.14 Small Jerry Kerns 8.38 7.59 9.53 10.74 9.94 10.18 7.93 10.62 9.08 9.83 10.94 10.08 Data as of Sept. 30, 2012 are inaccurate is unwise. You immediately cut off potential strategies and managers who could help your clients meet their goals. And in the end, that’s why we all invest—to meet goals, not to make statements. 7

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2013

Morningstar Advisor - February/March 2013
Letter From the Editor
Social Media, the Old- Fashioned Way
Do You Use Active Strategies?
Youth Appeal
How to Buy the Unloved 2013
Morningstar Managers of the Year
Investments á la Carte
Investment Briefs
Approaches to Absolute-Return Investing
In Agriculture, It’s Good to Be Strong
Yes, There Are Good Active Funds
The Decoupling
Where It Could Pay to Be Active
The Active Fund That Defies Obsolescence
The Epitome of an Active Manager
Lines of Communication
The Existence of Market Timing ‘Intelligence’
A Route to Commodities that Bypasses the Futures Market
Best Positioned for Health-Care Reform
Diversified Stock Funds That Earn Their Stars
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
A Twisted Debate

Morningstar Advisor - February/March 2013