Do the New Morningstar Mutual Fund Ratings Predict Top Mutual Fund Performance?
Compared to its old system, early data indicates that Morningstar’s new star mutual fund ratings system may have some mutual funds performance predictability. However, this new 5 star mutual rating system may just be a proxy for fund costs. Instead of using the stars, investors should use costs to screen funds, which are a more direct and proven indicator of future top mutual fund performance. For two decades, the Morningstar Ratings* have had a very significant impact on individual investors’ mutual fund purchase decisions. Because of its prominence, numerous academics and investment professionals have studied and published scientific investment papers about the Morningstar Rating system. In mid-2002, Morningstar made substantial changes to its star rating system. (See: How the new Morningstar Ratings for mutual funds have been determined since mid-2002) In late 2004, Morningstar issued a brief analysis of the first two years of data from the new mutual fund rankings.1 In “Studying th
