Morningstar - Q4 2021 - 21

Dispatches
Market
Value
$10T
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Morningstar US Treasury Bond Index
Morningstar US Corporate Bond Index
Global Briefs
TRENDS
12/2007 4.5 Years
Dollar-Cost Averaging Helps Close the Gap
Our annual " Mind the Gap " study of dollarweighted
returns-also known as investor
returns-found that investors earned about 7.7%
per year on the average dollar they invested
in mutual funds and exchange-traded funds over
the 10 years ended Dec. 31, 2020. This was
about 1.7 percentage points less than the total
returns their fund investments generated. This
shortfall, or " gap, " stems from inopportunely timed
purchases and sales of fund shares.
12/31/2007
12/31/2009
More specialized areas with the most volatile
cash flows-namely, alternative funds and sector
equity funds-fared much worse than average.
Allocation funds saw the smallest gap, suggesting
that their built-in asset-class diversification
makes them easier for investors to buy and hold.
12/31/2011
12/31/2013
12/31/2015
Dollar-cost averaging doesn't usually lead
to better results compared with a buy-and-hold
approach, but it can help investors avoid
Investment-Grade Corporates +369%
U.S. Treasury Bonds
Agency Mortages
12/31/2017
+368%
+97%
Duration has risen
dramatically since 2007.
08/2020 6.0 Years
$6.30
$6.54
some of the ill effects of poorly timed cash flows
by enforcing a more disciplined approach.
This is particularly true for the alternative category
group. Investors in these funds tend to make
frequent purchases and sales, but all that trading
hasn't led to better results. Following a more
disciplined approach would have improved returns
by more than 5 percentage points per year.
08/31/2020
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5
3
2
Morningstar US MortgageBacked
Securities Index
Morningstar US Core Bond Index
Effective
Duration
7 Years
$8.71
6
Amy C. Arnott, CFA, is a portfolio strategist at Morningstar.
U.S. Category Group
Gap %
Allocation
Alternative
International Equity
Municipal Bond
Sector Equity
Taxable Bond
U.S. Equity
-0.69
-4.33
-1.39
-1.25
-3.95
-1.12
-1.17
DCA Gap %
-1.29
1.26
1.05
-1.19
-1.11
-0.75
-1.09
Difference
-0.60
5.59
2.44
0.06
2.84
0.37
0.08
-6%
-3
3
Source: Morningstar. Data based on total returns for the 10-year period ended 12/31/2020. Dollar-cost averaging data is determined by assuming equal monthly investments made within each category group and then calculating an
internal rate of return.
6
5 Prominent
Fund Upgrades and
Downgrades
AMERICAS
United States
(virtually for now) with firms' compliance
teams, traders, analysts, and key executives, and
then distill that into a rating.
Morningstar Analyst Ratings are fundamentally
driven. We focus on a fund's people, process,
parent, and price to arrive at our ratings. We talk
with portfolio managers, run performance
attribution data, examine portfolio changes, visit
o Energy
€ Real Estate
f Utilities
y Financial Services
p Industrials
r Basic Materials
US Market Index
s Consumer Defensive
d Healthcare
i Communication Services
a Technology
t
Repeating that process over the years can
lead us to change our opinion, as can
events like changes to the performance profile
and the fundamentals listed above.
Upgrades to ratings tend to be spurred by
a subtle accumulation of favorable discoveries,
while some downgrades result from
more dramatic events like manager departures
or portfolio blowups.
Here are five prominent upgrades and downgrades
so far in 2021.
Upgrades
T. Rowe Price Retirement 2035 TRRJX
Before our most recent review, we already
had a High rating for the Parent and People pillars
on T. Rowe Price's target-date funds. Then we
raised Process to High from Above Average, which
took the funds' overall Analyst Rating to Gold
from Silver (the priciest share class remains
Bronze). We were impressed by changes that
T. Rowe made to the target-date funds' glide path
and how well the team executed that transition.
Oakmark International Small Cap Investor OAKEX
We raised our Analyst Rating on this fund to
Gold from Bronze by way of a Process upgrade to
High. A strong comeback from the COVID-19morningstar.com/lp/magazine
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https://www.morningstar.com/lp/mind-the-gap https://www.morningstar.com/lp/mind-the-gap https://www.morningstar.com/authors/2350/amy-c-arnott https://www.morningstar.com/funds/xnas/trrjx/quote https://www.morningstar.com/funds/xnas/oakex/quote http://www.morningstar.com/lp/magazine

Morningstar - Q4 2021

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