Great Funds with Low Star Ratings
Don't rule out these Analyst Picks with 3 stars or less.
One of the most common queries Morningstar's fund analysts are asked is "Why would you pick funds that only got 3 (or 2) stars?" This question partially stems from a common misunderstanding about the Morningstar Rating for funds and our Analyst Picks. The star rating is a strictly objective measurement of a fund's historical, risk-adjusted returns versus its category peers. In contrast, Analyst Picks are subjective, forward-looking judgments, often with an eye toward portfolio construction.
Choosing Analyst Picks is a rigorous process. One Morningstar fund analyst covers each Morningstar category and thoroughly reviews those funds once every five months. As part of the review, the analyst chooses a few funds that he or she believes are most likely to do well in investors' portfolios. The analyst then must defend these funds to the fund analysis group's senior management, who are tough customers. This experienced bunch cares less about hot past performance and more about reasonable expenses, sound strategies, attention to risk, and stable management.
It's no coincidence that of the 17 funds in the Morningstar 401(k) plan (click here to see Emily Hall's recent update on it), nine are now Analyst Picks and three were picks before recently closing. And these funds are in the 401(k) plan because they're picks, not the other way around. Three funds in our 401(k) plan currently have only 3 stars-- Turner Mid-Cap Growth (TMGFX), Tweedy, Browne Global Value (TBGVX), and Morgan Stanley Institutional US Real Estate (MSUSX). All of them are fairly steady performers in areas where many funds are volatile in both absolute and relative terms. Thus, they're still quite attractive. A fourth pick in the Morningstar 401(k) plan now holds only a 2-star rating-- American Funds New World (NEWFX), an emerging-markets fund. It lagged in the recent, red-hot emerging-markets rally because of its perennial 25% investment in developed markets and 10% cash stake. But those allocations also provide stability, a quality we appreciate, in a category whose losses can be steep.
Todd Trubey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.