I would like to hear what other posters think, but I am just not buying it.
In fact, the subject of survivorship bias often comes up during debates about active versus passive fund management approaches. Investors who favor passive fund management--in which funds track an index as opposed to having a manager pick specific securities to buy and sell--argue that survivorship bias skews performance comparisons because many underperforming actively managed funds that no longer exist are excluded, making active management's track record appear better than it really is. We won't try to settle that argument here.
What is to settle? Can Morningstar not do basic arithmetic? I think M* loses credibility with these comments. We know passive beats active. We know that the more people who know that, the fewer people will pay M* subscriptions for active mutual fund and stock research and M*'s business will take a serious blow.
But despite being subject to survivorship bias, fund trailing-return rankings and Morningstar Risk ratings are still a useful tool investors can use to compare a fund's performance to that of its surviving peers over time. After all, for investors trying to decide whether to buy, sell, or hold a fund, how that fund ranks relative to its current competition--rather than its performance relative to funds that no longer exist and are no longer available--is usually what matters most.
Not necessarily. Why would I not
care about the risk and returns of the funds who did so poorly they ceased to exist? Of course I care about the entire population of participants. If I learn that a particular type of investment consistently ranks highly on a risk-adjusted return scale in all categories when compared to all competitors both alive and dead (and I almost never have to worry about it doing so badly as to disappear), I might draw conclusions about that type of investment that would lead me to stop searching for something better (that "type of investment" being an index fund of course).
Personally, I feel like Morningstar has done as much as they possibly can to hide the superiority of index investing in light of the overwhelming evidence in its favor. Have they on occasion tipped a hat to index funds? Sure, but they don't give nearly the respect they deserve, and silly games like this just add to it (some returns series includes survivor bias, others doesn't -- confusing enough so that no one can remember what they're doing.