Morningstar Magazine - February/March 2018 - 13

QLEIX finished first in its category. AQR Equity
Market Neutral QMNIX was first in its category.
AQR Style Premia Alternative QSPIX was
first in its category. Of the four, only AQR Managed
Futures Strategy HV QMHRX had a mediocre
showing. Outgaining other funds succeeds
in the mutual fund industry. That was true when
grandpa drove the Oldsmobile, true when
your father did so, and it remains true today.
AQR's expenses haven't been bad, either; with
the share classes shown here all somewhat
cheaper than the norm. Clearly, though, the funds'
performance has been their main attraction.
Also, this illustration favors AQR, because three
of those fund share classes are institutional,
and the fourth is an R6 share class, which is priced
even below the institutional classes. (R6 is
a "clean" share class, meaning that it does not
share any revenue with the companies that
distribute AQR funds.) If retail funds are removed
from the comparison group, AQR's relative cost
advantage declines.

EXHIBIT 2

AQR Best Sellers The firm's most popular funds are mostly performance leaders.
Percentile Rank

Expenses

Performance
1

1
25

50
68

75
100
QLEIX

QMNIX

QSPIX

QMHRX

Performance calculated for trailing three years and ranked within Morningstar Category. Expenses ranked within Morningstar Fee Level Group - Broad.
Source: Morningstar. Data as of 10/31/2017.

EXHIBIT 3

Vanguard Best Sellers The sales leaders are also among the lowest-cost in their class.
Percentile Rank

Expenses

Performance
1

2
14

Low-Cost Leaders

Now, let's look at Vanguard's chart in E X HIB IT 3 .
As with AQR's figures, Vanguard's are generated
for its four top-selling mutual funds for the
year through October: Vanguard Total Stock Market
Index VITSX, Vanguard 500 Index VFIAX,
Vanguard Total International Bond Market Index
VTABX, and Vanguard Total International Stock
Index VTIAX.
Again, the first bar in each set represents
relative total returns and the second shows
relative expenses. (The particular share
classes shown here were the most popular ones
with records of at least three years.)
It's almost certainly what you expected: Cost
triumphs. All of the Vanguard funds are among the
cheapest 3% in their group-and these share
classes aren't necessarily the cheapest available
for each fund.
The performance bars also follow the customary
Vanguard formula. None of them reach the
top, because index funds don't generally place
first in their categories, but three of the four funds
place in their category's top quartile. That

50
75
100

VITSX

VFIAX

VTABX

VTIAX

Performance calculated for trailing three years and ranked within Morningstar Category. Expenses ranked within Morningstar Fee Level Group - Broad.
Source: Morningstar. Data as of 10/31/2017.

is a typical achievement for a bargain-priced
index fund: Land somewhere near the first
quartile for three years, then gradually move up
the rankings over time, because the expense
advantage is ongoing, while relative performance
comes and goes.
Half True

It relies on performance, not costs. That means
that AQR faces the greater challenge of
the two firms in maintaining its supremacy. Staying
cheap is not hard. Staying number one most
certainly is. K
John Rekenthaler is vice president of research
with Morningstar Research Services.

Which, rather neatly, brings us to the conclusion.
Is AQR the Vanguard for alternative investing?
Yes and no. Yes, in that AQR rules its (much smaller,
albeit highly profitable) roost. The nonconformity of alternatives has enabled somebody
besides Vanguard to prevail within that
portion of the industry, and AQR has become that
somebody. No, in that AQR's formula is different.

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Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2018