Fund Ranks Retooled

2/17/2014


If it's not broke, don't fix it. That advice could apply to our fund-rating system, which has uncovered standout picks since its introduction in 1999. While we don't want to mess with success, we recently looked for ways to get more out of our scoring system. On Feb. 7 we made a handful of adjustments.

The current system divides more than 4,400 mutual funds and exchange-traded funds into 108 groups. Equity funds are grouped by investment style and the market capitalization of the stocks held in their portfolios. Bond funds are grouped by the type and length of maturity of their securities.

Ranks are computed monthly by evaluating after-tax returns and various periods of total returns, including a newly added three-month return. Research has shown that in many cases short-term performance is persistent. The scores also consider such risk-adjusted performance metrics as Sharpe ratio, which compares a fund's returns above a risk-free rate to its volatility. We now include alpha, which measures the difference between a fund's expected returns based on beta (a gauge of a fund's sensitivity to market movements) and its actual returns.

Historically, expense ratios have been the best predictors of future fund performance. With that in mind, we added a second expense factor — gross expense ratio — to reward funds that aren't temporarily waiving fees to lower their costs. In addition, we more than doubled the weights of expense ratios in our system. All fund ranks are relative to group peers, so Artisan International's ($30; ARTIX) score of 96 means it ranks better than about 96% of large-cap foreign funds.

Our new fund ranks are not foolproof; researchers have devoted countless hours attempting to determine what drives fund performance, mostly with limited success. Still, the ranks help uncover high-potential funds. Among our 20 recommended funds with ratings, 16 earn scores of 80 or higher, ranking them near the top 20% of their category. Note that PIMCO Total Return ($106; BOND) lacks sufficient data to be ranked.

If you are looking to fill a void in an existing portfolio, shop first among our recommended funds. Among U.S. stock funds, T. Rowe Price New Horizons ($46; PRNHX), which earns the maximum rank of 100, is a standout in the small-cap growth category. Among midcap value funds, Vanguard Selected Value ($28; VASVX) earns an impressive score of 99. Bond fund investors should consider Thompson Bond ($12; THOPX), with a fund rank of 93. All three funds are components of our recommended Growth and Conservative portfolios.

Not all of our funds are standouts. Vanguard Total International Stock Market ($16; VGTSX) has lagged its peers and now earns a fund score of only 44. The fund, which is not a member of our recommended portfolios, is being dropped from coverage. Artisan International is a better option and our favorite pick in its category. Dreyfus Midcap Index ($36; PESPX) and Vanguard Total Bond Market ($11; VBMFX) have middling scores, but we are sticking with both funds because of their low expenses and broad market exposure.

OUR RECOMMENDED MUTUAL FUNDS
Through Feb. 11, our Growth Portfolio has dipped 1.3%, versus a loss of 1.2% for its benchmark portfolio. The Conservative Portfolio is down 0.9%, versus a loss of 0.5% for its benchmark.
Year-To-Date *
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating †
Artisan International ($30; ARTIX)
(2.2)
D
9
9
96
Dreyfus Midcap Index ($36; PESPX)
(1.3)
B
0
0
61
Dreyfus Small Cap Stock Index
($28; DISSX)
(4.2)
D
0
0
91
Fidelity High Income ($9; SPHIX)
1.0
D
5
4
65
Homestead Small Company
($36; HSCSX)
(3.3)
C
5
8
94
PIMCO Total Return ETF
($106; BOND)
1.7
A
6
0
NA
T. Rowe Price New Horizons
($46; PRNHX)
0.4
A
9
9
100
T. Rowe Price Value
($34; TRVLX)
(0.3)
A
8
9
93
Thompson Bond ($12; THOPX)
0.9
A
6
0
93
Vanguard 500 Index ($168; VFINX)
(1.4)
B
6
7
81
Vanguard Dividend Growth
($21; VDIGX)
(2.5)
E
12
12
85
Vanguard GNMA ($11; VFIIX)
2.0
A
0
0
96
Vanguard Growth Index
($48; VIGRX)
(0.2)
C
11
11
81
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
1.9
B
0
0
90
Vanguard Selected Value
($28; VASVX)
(2.0)
D
5
7
99
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
0.6
B
0
0
97
Vanguard Total Bond Mkt. Index
($11; VBMFX)
1.4
C
0
0
53
Vanguard Wellesley Income
($25; VWINX)
0.2
C
0
0
98
Vanguard Wellington ($38; VWELX)
(0.4)
B
6
9
96
Wasatch International Growth
($28; WAIGX)
(2.3)
D
7
8
71
Wells Fargo Advantage Discovery
($33; STDIX)
(1.2)
D
5
7
85

* Year-to-date ranks through Feb. 11 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%.
† Fund ratings are percentile ranks based on our fund-rating system.


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