Morningstar Magazine - August/September 2018 - 33

EXHIBIT 2

EXHIBIT 3

Limited Success The median success ratio, which considers the
effects of fees and fund liquidations, ranged from 9% to 49%.

Range of Outcomes In some categories, the gross excess return
median moved in a tight range near zero. In others, the
median moved in a much wider range around the benchmark.
Thus, no meaningful forecast of typical excess returns can
be made in these categories.

Success Ratio

0%

% Outperforming

10

20

First quartile

30

level of index turnover: From 2014 through 2016,
the average turnover rate for the Bloomberg
Barclays US Aggregate Bond Index was
40% annualized. This is in contrast to an annual
turnover rate of less than 5% for the S&P
500. A portfolio seeking to fully replicate the
performance of the fixed-income index would incur
significant transaction costs when buying
and selling securities at each monthly rebalancing.
Moreover, the performance of the index itself
ignores transaction costs, giving it a structural
advantage. The effect is especially large

40

50

Third quartile

-9
-6
-3
3-Year Gross Excess Return Medians

in less-liquid areas of the market, such as high
yield or segments of emerging-markets debt,
where transaction costs are higher, making it even
more difficult to match the performance of
the index. This also makes it more difficult for ETFs
in these categories to track their indexes.
The second factor is behavioral, and it is linked to
the challenges that the current environment
of low yields poses for bond funds. While
our study spans 15 years, that period has been
characterized by low interest rates, with only

Minimum

Maximum

0

Median

3

6

short bouts of moderate interest-rate hikes.
In particular, the years after the global financial
crisis have seen interest rates trend toward
unprecedentedly low levels, which has
led companies and governments to extend the
maturity of their debt. As a result, the average
maturity and duration of most bond indexes
has trended upward. In this context, many bond
managers have not been able or willing
to increase the interest-rate risk of their portfolios
to the level of the benchmarks. Indeed,
our data shows that the average fund in most

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33


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Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018

Contents
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Morningstar Magazine - August/September 2018 - Contents
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