Morningstar Advisor - August/September 2011 - (Page 31)

odds aren’t insurmountably long—one in five or one in 10, at worst—by choosing a fund at random. But that’s misleading in that it overlooks evidence suggesting that only about two thirds of funds will even remain in the same category in five years, while the other third will depart because of category changes, merger, or liquidation (as shown in Exhibit 1). The point isn’t that picking outperformers is a hopeless endeavor; it’s that investors might set themselves up to fail simply by setting their sights too narrowly to account for the possibility of category changes. Put another way, if they knew just how long the odds were after accounting for that possibility, they might seek an approach that gave them a better chance at succeeding, such as constructing broader peer groups. Use Bigger Bricks Our research suggests that funds move around in the normal course, making it somewhat unrealistic to expect an investment to “stay at home.” This has implications for investors who build portfolios brick by brick, assuming that the funds they choose will remain true to the style advertised. For example, they might want to think more expansively about the role a fund could play in a portfolio, which in turn could argue for owning fewer funds in simpler, easier-to-manage portfolios. Flexible Ranking About Morningstar Investment Services Morningstar Investment Services brings fee-based advisors the resources of an independent, experienced investment team. The team’s range of customizable stock, ETF, and mutual fund portfolios is guided by proprietary methodologies and leverages the well-recognized research of Morningstar, Inc. For more information, visit http://global. morningstar.com/mis or call +1 877 751-4208. Our research seems to confirm that mutual fund categories are dynamic, with funds regularly entering and exiting peer groups because of category reclassification, merger, or liquidation. This can muddy comparisons of even seemingly similar funds and has implications on the way researchers evaluate relative performance and other attributes. In light of this finding, it’s worthwhile to consider other, more-flexible ways of ranking funds and think more expansively about peer groups and portfolio construction. K Jeffrey Ptak, CFA, is president and chief investment officer of Morningstar Investment Services. USCI-tombstone-ad-halfpg-cmyk.pdf 1 6/27/11 2:45 PM C M Y CM MY CY CMY K MorningstarAdvisor.com 31 http://global.morningstar.com/mis http://global.morningstar.com/mis http://unitedstatescommodityindexfund.com/pdfs/usci-prospectus.pdf http://unitedstatescommodityindexfund.com/pdfs/usci-prospectus.pdf http://unitedstatescommodityindexfund.com/pdfs/usci-prospectus.pdf http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2011

Morningstar Advisor - August/September 2011
Contents
Contributors
Letter From the Editor
Simplicity and Design Matter
Do You Use ETFs Strategically or Tactically?
The Institutional Way
How to Analyze an ETF
Eyeing ETFs’ Next Chapter
Small-Cap/Large-Cap Flip-Flop?
Four Picks for the Present
Investment Briefs
Morningstar Investment Conference
Pitfalls of Peer Groups
A REIT Recovery, With a Catch
Turning Fund Distribution on Its Head
Here Come ETF Managed Portfolios
Circle These Picks Amid the Crop of New ETFs
ETF Analyst Favorites
Beware, the Accidental Portfolio Manager
It’s the Destination, Not the Vehicle
New Growth, Rooted in Experience
Better Ways to Look at ETFs
How to Better Manage Your Clients’ Future(s)
More Bargain Than Bubble
Cheap, Local, and On a Roll
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
First-Quarter Assets Hit an All-Time High
You Say You Want a Revolution?

Morningstar Advisor - August/September 2011