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Morningstar Runs the Numbers

We take a numerical look through this week's Morningstar research. Plus, our most popular articles and videos for the week ended Oct. 27.

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Inspired by Harper's Index (with a tip of the hat to FiveThirtyEight's Significant Digits blog), Morningstar Runs the Numbers uses a numbers-based approach to highlight recent Morningstar research, along with some outside news stories.

6 upgrades; 3 downgrades
Our manager research analysts released our new Analyst Ratings and reports for 62 of the nation's largest 529 college savings plans.

"The 529 industry made meaningful improvements over the last year, with many plans reducing expenses and improving the asset-allocation approach used within the age-based portfolios by smoothing out the transition from stocks to bonds as the beneficiary ages," said senior analyst Leo Acheson.

Read about the six upgrades here. The three downgrades are here.

4% for stocks; 3% for bonds
As part of her annual visit to the Bogleheads event in Valley Forge, Pennsylvania, director of personal financial Christine Benz sits down with Vanguard founder Jack Bogle to get his "reasonable expectations" for returns for the major asset classes. This year, his outlook wasn't too rosy. (Watch the whole conversation here.)

"[Using] a 50% U.S. Treasury 10-year ... and 50% corporate bond index, that gives me about a 3% average return on bonds for the coming decade. You can see that's very close to the stock return. So, it's a 1% equity premium. People are guessing what that premium will be. I don't presume to know. I don't start with the premium and end with the return. I start with the returns and end with the premium. I think, honestly, that's a better way to do it."

Google parent  Alphabet (GOOG) handily beat our third-quarter 2017 top- and bottom-line expectations as YouTube and cloud drove strong double-digit growth in advertising and other revenue, respectively, said equity analyst Ali Mogharabi. While cost-per-click continued its decline, it was more than offset by growth in ad engagements, or paid clicks, which demonstrates the firm's strong network effect benefiting both users and advertisers, he said. Though Mogharabi plans to raise Alphabet's fair value estimate $1,100 per share from $1,030, he recommends a wider margin of safety before allocating capital toward this wide-moat and high uncertainty-rated name.

Those relatively new to bond investing won't want to miss senior analyst Eric Jacobson's explanation of four bond-fund basics worth knowing.

 Amazon (AMZN) reported better than expected net sales--up 34% in the third quarter--boosted in part from strong sales at recently acquired Whole Foods. Amazon Web Services was the other major sales driver during the period, the company reported. Consumer strategist R.J. Hottovy said he is planning to modestly increase Amazon's $1,200 fair value estimate and views the shares as undervalued.

"Amazon’s third-quarter update made a convincing case that the network effect underpinning our wide moat is strengthening, with revenue trends before Whole Foods accelerating across most revenue categories and indicating greater engagement among Prime members, third-party sellers, and AWS users."

Morningstar's Sustainability Rating can help investors identify funds whose underlying holdings have strong sustainability characteristics. A 5-globe sustainability rating indicates that the fund's holdings fare better on ESG metrics than those of 90% of its peers. But the Sustainability Rating is not intended to identify a fund that has an intentionally sustainable or ESG mandate. It's possible that a fund without an ESG mandate by prospectus will score highly just by happenstance. 

For funds that specifically claim to pursue a sustainability-related theme, the Sustainability Rating can provide a good reality check. It is not unreasonable to expect a fund with an intentional ESG mandate to have a 5- or 4-globe rating, said head of sustainability research Jon Hale. He examines five intentional ESG funds that have Morningstar Sustainability Ratings of 5 globes and also earn analyst medals.

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    Vanguard FTSE Developed Markets ETF does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.