About Our Process

We calculated the Select Equity, Average Equity and American Funds groups by building equal-weighted portfolios using the average monthly returns of the constituents and then calculating a growth of $100,000 for the groups and the index for each rolling period indicated (one-, three-, five- and 10-year) over the period from June 1999 to June 2019.

We calculated the percentage of time the Select Equity group and the Average Equity group beat the index by building an equal-weighted portfolio using the average monthly returns of the constituents and then calculating a relative return against the index for each rolling period indicated (one-, three-, five- and 10-year) over the period from June 1999 to June 2019. For example, to derive rolling one-year results for the Select Equity group, we started with the product of the 12 monthly returns for June 1999 to June 2000 and subtracted the product of the monthly index returns over the same period. Next, we ran the same calculations using the 12 monthly returns for July 1999 to July 2000. We did this for every rolling 12-month period through June 2019, and then calculated the percentage of 12-month periods that the Select Equity group beat the index. We used the same process for the Average Equity group of funds.

Compiling the Fund Universe

The database built to represent the universe of both large-cap domestic and large-cap foreign funds drew from Morningstar’s U.S. Open-End Large Value, Large Blend and Large Growth U.S. and Foreign categories, with live and dead funds combined to eliminate survivorship bias. For live funds, only the oldest share class was used. The oldest share class designation used in the screening process does not reflect the recent Morningstar methodology change for funds incepted prior to 12/31/2015, as it is based on a previously existing database of Morningstar fund identifiers. Funds incepted after that date are identified with Morningstar’s new methodology. For dead funds with multiple share classes, the median monthly returns were used. For fee-related illustrations that include dead funds with multiple share classes, the median expense ratios were used. This screening resulted in seven qualifying domestic American Funds (AMCAP Fund, The Growth Fund of America, The New Economy Fund, American Mutual Fund, Fundamental Investors, The Investment Company of America and Washington Mutual Investors Fund) and two qualifying foreign American Funds (EuroPacific Growth Fund and International Growth and Income Fund). Funds are identified as domestic or foreign based on Morningstar categories. A number of the U.S.-focused American Funds can invest some assets in non-U.S. securities; likewise, the two foreign-focused American Funds can invest some assets in U.S.-issued securities.

Tracking Low Expenses & High Manager Ownership

In conducting our research, we searched Morningstar’s database for large-cap actively managed funds that were in both the lowest quartile ranked by expense ratio and the highest quartile ranked by manager ownership at the firm level. For this analysis we relied on Morningstar Direct data analysis software.

Least expensive quartile was calculated using annual report Net Expense Ratio (NER) for all observed Morningstar categories for the 20-year period indicated. For funds with missing expense ratios, gaps between two available data points were filled in using linear interpolation. Linear interpolation is a statistical method used to estimate the values between two known data points in a time series. Highest manager ownership quartile was calculated using weighted averages of Morningstar screens of manager holdings at the firm level. Each fund was assigned the weighted average of its firm manager holding. Funds without values were excluded from the quartile rankings. The combination of least expensive NER and highest manager ownership quartiles (the screened equity core) was the result of a cross-section of the two screens. Only those funds with both the lowest expense ratios and the highest manager ownership were included.

Investors who wish to identify funds that ranked in the least expensive quartile by NER can rely on the following rule of thumb: The least expensive quartile of funds ranked by net expense ratio roughly corresponded with those reporting expenses below 1.00% for large-cap domestic funds and below 1.08% for large-cap foreign funds. Expense ratios for institutional and advisory share classes would be approximately 25 basis points lower, or below 0.75% for large-cap domestic funds and below 0.83% for large-cap foreign funds. Investors who wish to identify funds that ranked in the top quartile by manager ownership can rely on the following rule of thumb: The top quartile of funds ranked by manager ownership roughly corresponded with firms that had 55% or more assets in the fund family complex in which at least one fund manager had invested a minimum of $1 million.

The Securities and Exchange Commission (SEC) requires that mutual funds disclose all fees and expenses in a standardized table published in the front portion of the fund prospectus. The SEC also requires that a fund disclose in its statements of additional information (SAI) certain information about its portfolio managers, including ownership of securities in the fund. Ownership disclosure is made using the following seven ranges: none; $1 to $10,000; $10,001 to $50,000; $50,001 to $100,000; $100,001 to $500,000; $500,001 to $1,000,000; and over $1,000,000.

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