Morningstar - Q1 2020 - 19

20

ranking. In other words, if most of a fund's assets
were cheap relative to peer groups in similar
channels, we'd be more likely to boost ratings; if
they were pricier, we'd lower them. Now that more
share classes have become available to more
people, we think it's helpful to rate them all
against each other.
We start by estimating the potential for alpha
in a category by looking at the historical dispersion
of returns. That leads us to a prefee alpha
estimate for the category. We adjust that up or
down based on our view of the people, process,
and parent of a fund.
Then, we subtract each share-class expense ratio
from that figure to arrive at a separate overall
rating for each share class. In a category with a
modest alpha estimate, a fund with some positive
attributes might see a wide range of ratings.
In other areas, where fees are uniformly high or
low for a fund or where alpha potential is
higher, a fund's ratings are likely to be limited to
one or two levels.

TRE NDS

12/2009
Equity Investors Aren't Chasing
Returns

11/2019

Source: Morningstar.

Here's one of the odder sights in the mutual
fund world these days. In the chart below, the top
line, jutting ever higher, is the return of the
average large-growth fund since Dec. 1, 2009
(expressed as the growth of $10,000). The
average large-growth fund-not the best, mind
you, the average fund, after fees-gained
a cumulative 239% during the decade through
Nov. 30. That showing bests all but three
of the 95 Morningstar Categories we tracked over
that span.

Organic Asset Growth
Cumulative Total Return
$30K
186%
20
61%
10
0
11/2019

Source: Morningstar.

Organic Asset Growth
Cumulative Total Return
$40K
239%
30

20

10
-30%
0
12/2009

Foreign Large-Blend Funds Rake It In Despite
So-So Returns

12/2009

U.S. Large-Growth Funds Rack Up Returns,
Lose Assets

So that it's more apparent how we arrived at the
ratings, we are getting more granular by
breaking out our pillar ratings into five levels rather
than three. Our new scale is Low, Below Average,
Average, Above Average, and High.
JPMorgan Government Bond earns ratings of
Above Average for Parent, People, and Process.
Because government-bond funds have
tightly packed returns before fees, our model
assigns a low alpha potential. That in turn explains
why ratings for the share classes span all
the way from Neutral to Silver. The R6 share class
charges 0.35% and received a Silver rating.
Other share classes were in the second-cheapest
quintile for the category and got a Bronze.
More expensive share classes received Neutrals.
That might seem like we are slicing it awfully
close, but past returns illustrate the point.
Only the two cheapest share classes beat the
fund's benchmark return of 2.9% over the
five years ended September, and the two share
classes charging more than 1% were the only ones
to lag the benchmark return of 3% over the
past 10 years. That's hindsight, so it's not a claim
of ratings success. However, it is an illustration

10
-30%
0

11/2019

Source: Morningstar.

Foreign Large-Blend Funds Rake It In Despite

So-So think
Returns
You'd
that would be catnip for investors.
In fact,
investors
sold and sold and
Organic
Asset have
Growth
Total
Return
soldCumulative
some more.
That's
that sad bottom line
$30K
trending downward. Investors have pulled around
30% of the category's assets over the past 186%
decade, during which large-growth funds have
20
beaten nearly all comers.
61%

We've seen this scenario play out in reverse 10
in the foreign large-blend category. The
0
average foreign large-blend fund gained only
12/2009
11/2019
about 4.8% per year over the past decade
Source: Morningstar.
through Nov. 30. Nevertheless, investors have
pumped money into foreign large-blend
funds with abandon, as shown by the category's
nearly 186% organic asset growth rate
since December 2009.

As the fund industry took flight in the 1990s,
the stocks of high-flying, fast-growing U.S.
firms made for a great "story" sales pitch-and
large-growth funds eventually accounted
for around one fourth of the fund industry's
assets by 2000. Nearly three fourths of all inflows
to large-growth funds in 2000 went into
"load" share classes. Saying large-growth funds
were oversold is probably putting it mildly.
Since then, investors have sought to spread
assets more widely across asset classes,
and when they've done so they've often opted for
Q4 2019-Credit Comes Back
core options. We can see this clearly in the
Intermediate Core Bond
surge of flows to large-blend stock funds
Intermediate Core-Plus Bond
Total Return
over the last decade. (See "Fund Flows Spotlight,"
6%
Page 79.)
This shift indicates the extent to which the
fund and financial advice industries have
3
changed. Investors are increasingly opting for
low-cost, diversified solutions as part of a
broader financial plan or being opted into cheap
0
investment options like target-date funds
10
20
30
0
that
do the choosing for them.
And they're
% Non-Investment-Grade
Assets
probably getting less-conflicted advice
from advisors who have less incentive to sling
Have Lowest Share of 4- and 5-Star Ratings
productUtilities
than before.
Sector
QQQQQ
Jeffrey Ptak
is head of manager research for
Morningstar
Research Services.

QQQQ

Basic Materials

Consumer Cyclical
Consumer Defensive

Morningstar June/July 2018

Energy

19



Morningstar - Q1 2020

Table of Contents for the Digital Edition of Morningstar - Q1 2020

Contents
Morningstar - Q1 2020 - Cover1
Morningstar - Q1 2020 - Cover2
Morningstar - Q1 2020 - 1
Morningstar - Q1 2020 - 2
Morningstar - Q1 2020 - Contents
Morningstar - Q1 2020 - 4
Morningstar - Q1 2020 - 5
Morningstar - Q1 2020 - 6
Morningstar - Q1 2020 - 7
Morningstar - Q1 2020 - 8
Morningstar - Q1 2020 - 9
Morningstar - Q1 2020 - 10
Morningstar - Q1 2020 - 11
Morningstar - Q1 2020 - 12
Morningstar - Q1 2020 - 13
Morningstar - Q1 2020 - 14
Morningstar - Q1 2020 - 15
Morningstar - Q1 2020 - 16
Morningstar - Q1 2020 - 17
Morningstar - Q1 2020 - 18
Morningstar - Q1 2020 - 19
Morningstar - Q1 2020 - 20
Morningstar - Q1 2020 - 21
Morningstar - Q1 2020 - 22
Morningstar - Q1 2020 - 23
Morningstar - Q1 2020 - 24
Morningstar - Q1 2020 - 25
Morningstar - Q1 2020 - 26
Morningstar - Q1 2020 - 27
Morningstar - Q1 2020 - 28
Morningstar - Q1 2020 - 29
Morningstar - Q1 2020 - 30
Morningstar - Q1 2020 - 31
Morningstar - Q1 2020 - 32
Morningstar - Q1 2020 - 33
Morningstar - Q1 2020 - 34
Morningstar - Q1 2020 - 35
Morningstar - Q1 2020 - 36
Morningstar - Q1 2020 - 37
Morningstar - Q1 2020 - 38
Morningstar - Q1 2020 - 39
Morningstar - Q1 2020 - 40
Morningstar - Q1 2020 - 41
Morningstar - Q1 2020 - 42
Morningstar - Q1 2020 - 43
Morningstar - Q1 2020 - 44
Morningstar - Q1 2020 - 45
Morningstar - Q1 2020 - 46
Morningstar - Q1 2020 - 47
Morningstar - Q1 2020 - 48
Morningstar - Q1 2020 - 49
Morningstar - Q1 2020 - 50
Morningstar - Q1 2020 - 51
Morningstar - Q1 2020 - 52
Morningstar - Q1 2020 - 53
Morningstar - Q1 2020 - 54
Morningstar - Q1 2020 - 55
Morningstar - Q1 2020 - 56
Morningstar - Q1 2020 - 57
Morningstar - Q1 2020 - 58
Morningstar - Q1 2020 - 59
Morningstar - Q1 2020 - 60
Morningstar - Q1 2020 - 61
Morningstar - Q1 2020 - 62
Morningstar - Q1 2020 - 63
Morningstar - Q1 2020 - 64
Morningstar - Q1 2020 - 65
Morningstar - Q1 2020 - 66
Morningstar - Q1 2020 - 67
Morningstar - Q1 2020 - 68
Morningstar - Q1 2020 - 69
Morningstar - Q1 2020 - 70
Morningstar - Q1 2020 - 71
Morningstar - Q1 2020 - 72
Morningstar - Q1 2020 - 73
Morningstar - Q1 2020 - 74
Morningstar - Q1 2020 - 75
Morningstar - Q1 2020 - 76
Morningstar - Q1 2020 - 77
Morningstar - Q1 2020 - 78
Morningstar - Q1 2020 - 79
Morningstar - Q1 2020 - 80
Morningstar - Q1 2020 - Cover3
Morningstar - Q1 2020 - Cover4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2024q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2023q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2022q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019winter
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019fall
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019summer
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019spring
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20191201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20141011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20141201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120405
https://www.nxtbook.com/nxtbooks/morningstar/investorconference2012
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20091011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008catalog
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008winter
https://www.nxtbookmedia.com