Best Fit Alpha

Alpha is a measure of the difference between a fund’s actual returns and its expected performance, given its level of risk as measured by beta. The best fit Alpha represents the market index that shows the highest correlation between a fund and an index over the most-recent 36 months based on the best fit R-squared.

To find the best fit R-squared, Morningstar regresses a fund's monthly excess returns against the monthly excess returns of several well-known market indexes.

The following indexes are regressed against each equity fund:

CSFB High Yield

Dow Jones 60% Global Portfolio

Dow Jones Financial

Dow Jones Healthcare

Dow Jones Telecommunications

Dow Jones Utility

GOLDMAN SACHS NATURAL RESOURCES

JSE Gold  (USD)

Barclays Long Term Treasury Bond

MSCI AC Far East ex Japan ID

MSCI AC World ID

MSCI EAFE NDTR_D

MSCI EASEA (EAFE ex JAPAN) NDTR_D

MSCI EM ID

MSCI EM Latin America ID

MSCI EUROPE NDTR_D

MSCI Japan NDTR_D

MSCI PACIFIC NDTR_D

MSCI PACIFIC ex JAPAN NDTR_D

MSCI WORLD ex US NDTR_D

MSCI World Metals & Mining ID

MSCI World NDTR_D

Merrill Lynch Conv Bonds, All Qualities

Pacific Stock Exchange Tech 100

Russell 1000

Russell 1000 Growth

Russell 1000 Value

Russell 2000

Russell 2000 Growth

Russell 2000 Value

Russell Midcap Growth

Russell Midcap Value

Standard & Poor's 500

Standard & Poor's Midcap 400

DJ Wilshire 4500

DJ Wilshire REIT        

     

The following indexes are regressed against each bond fund:

6 Month CD

CSFB High Yield

Citigroup ESBI-Capped Brady

Citigroup Non-$ World Govt Bond

Dow Jones 60% Global Portfolio

Barclays 1-5 YR GOVT

Barclays 1-5 YR GOVT/CREDIT

Barclays 5-10 Yr Govt/Credit

Barclays Long Term Govt/Credit Bond

Barclays Municipal 10YR (8-12)

Barclays Municipal 20YR (17-22)

Barclays Municipal 3YR (2-4)

Barclays U.S. Universal Bond

Barclays Aggregate Bond

Barclays Credit Bond

Barclays Government Bond

Barclays Intermediate Treasury

Barclays Long Term Govt Bond

Barclays Long Term Treasury Bond

Barclays Mortgage-Backed Bond

Barclays Municipal Bond

Barclays Municipal California

Barclays Municipal New York

MSCI AC World ID

Merrill Lynch Conv Bonds, All Qualities

Russell 2000

Standard & Poor's 500

DJ Wilshire 4500

Benefits

Both the standard and best-fit results can be useful to investors. The standard index R-squared statistics can help investors plan the diversification of their portfolio of funds. For example, an investor who wishes to diversify and already owns a fund with a very high correlation (and thus high R-squared) with the S&P 500 might choose not to buy another fund that correlates closely to that index. In addition, the best-fit index can be used to compare the betas and alphas of similar funds that show the same best-fit index.