Morningstar Ratings and Mutual Fund Performance

Blake, Christopher R.; Morey, Matthew R.

doi:10.2139/ssrn.168668

Cited by 68 publications

(105 citation statements)

References 18 publications

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“…The rating, which in some ways is similar to a classification system, is a matter of great interest in finance, where ratings are assigned to countries, to credits, to bonds, to managed portfolios, etc. (Krink et al 2007; Krishnan and Lawrence, 2007;Jewell and Livingston, 2002;Blake and Morey, 1999). In the mutual funds industry, then, the rating is particularly important because the score given to funds by rating agencies affects and leads the investment decisions of both private and institutional financial agents (Del Guercio and Tkac, 2008; Knuutila et al, 2006).…”

Section: Introductionmentioning

confidence: 99%

On the Role of Risk in the Morningstar Rating for Mutual Funds

Lisi

Caporin

2009

SSRN Journal

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In the mutual funds industry the rating process is very important, and Morningstar is surely the most influential international rating agency . In this work we consider the problem of evaluating if the risk component is adequately accounted for in the Morningstar rating. To face this problem we compare the ratings produced giving different weights to the risk component. The focus of the analysis is on testing the hypothesis that two similar rating procedures with different risk parameters (or, in statistical terms, two raters) are equivalent. To that end, first the notion of β−equivalence is introduced and then a Monte Carlo test for the hypothesis of β−equivalence is described. Finally, to answer the question on the role of risk in the Morningstar rating, we analyze 1763 monthly return time series of US mutual funds. Results show that the current Morningstar classification, based on a risk-adjusted measure, only marginally accounts for risk and that if we want that risk really matters, the risk parameter should be increased.

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Section: Introductionmentioning

confidence: 99%

On the Role of Risk in the Morningstar Rating for Mutual Funds

Lisi

Caporin

2009

SSRN Journal

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“…at least once per year) and the performance horizon is not longer than about one-year (e.g. Grinblatt and Titman 1992, Hendricks, Patel and Zechauser 1993, Brown and Goetzmann 1995, Carhart 1997, Wermers 2003, Blake and Morey 2000, Bollen and Busse 2005, Mamaysky, Spiegel and Zhang 2004. A recent exception is Teo and Woo (2001) who find persistence in style adjusted returns for up to six years.…”

mentioning

confidence: 99%

UK mutual fund performance: Skill or luck?

Cuthbertson

Nitzsche

O’Sullivan

2008

Journal of Empirical Finance

208

132

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Using a comprehensive data set on (surviving and non-surviving) UK equity mutual funds, we use a cross-section bootstrap methodology to distinguish between ‘skill’ and ‘luck’ for individual funds. This methodology allows for non-normality in the idiosyncratic risk of the funds — a major issue when considering those funds which appear to be either very good or very bad performers, since these are the funds which investors are primarily interested in identifying. Our study points to the existence of stock picking ability among a relatively small number of top performing UK equity mutual funds (i.e. performance which is not solely due to good luck). At the negative end of the performance scale, our analysis strongly rejects the hypothesis that most poor performing funds are merely unlucky. Most of these funds demonstrate ‘bad skill’. Recursive estimation and Kalman ‘smoothed’ coefficients indicate temporal stability in the ex-post performance alpha's of winner and loser portfolios. We also find performance persistence amongst loser but not amongst winner funds

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“…However, earlier studies have revealed that the majority of mutual funds in the US did not perform any better than the indices against which they have been measured. Blake and Morey (1999) point out that there is very little statistical evidence that Morningstar's highest rated funds outperform the next-to-highest or the median-rated funds. They also point out that Morningstar ratings do no better than the "naïve" predictor (historical average monthly return) for predicting fund performance.…”

Section: Introductionmentioning

confidence: 93%

“…Using returns per unit of risk (standard deviation) and expense, we rank two distinctly rated groups of funds, viz., the Morning Star 5-star and 3-star, and assess the efficiency of both. As Blake and Morey (1999) point out that Morning Star 1-star and 2-star rated funds are poor performers and as there's little statistical difference between the returns of 5-star, 4-star and 3-star rated funds, we use 5-star and 3-star rated funds for this study. We exclude 4-star funds, since they may not be so different from highest rated fund and could well be "leftovers" under Morningstar rating system.…”

Section: Introductionmentioning

confidence: 99%

Mutual Fund Ratings and Efficiency: An Examination of the Relationship

Raj

Uddin²

2016

AFR

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Morning Star is a rating agency that rates mutual funds based on past performance. The best performing funds are rated 5* while the lowest performing ones are rated 1*. Investors rely heavily on these ratings for making their investment decision. Funds with high rating tend to attract millions of dollars more than those rated lower. The highly rated funds also charge higher management fees as compared to the lower rated funds. Very few studies have examined whether the higher ratings and fees are justified by better performance. In this paper we use a Data Envelopment Based measure of efficiency to examine whether the funds rated 5* are more efficient than funds that are rated 3* by Morning Star ratings. We use returns as the sole output and standard deviation and expense ratio as the two inputs. The results of the study indicate that by and large the Morning Star 5* funds are more efficient than the 3* funds. Another significant find is that small cap funds are generally more efficient than large caps. This implies that even within a particular rating category small funds may be a better investment. The findings of the paper are significant as they provide evidence that ratings are a useful tool for investors in the selection of funds.

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Morningstar Ratings and Mutual Fund Performance

Cited by 68 publications

References 18 publications

On the Role of Risk in the Morningstar Rating for Mutual Funds

On the Role of Risk in the Morningstar Rating for Mutual Funds

UK mutual fund performance: Skill or luck?

Mutual Fund Ratings and Efficiency: An Examination of the Relationship

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