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Morningstar Ratings and Mutual Fund Performance

Published online by Cambridge University Press:  06 April 2009

Abstract

This study examines the Morningstar rating system as a predictor of mutual fund performance for U.S. domestic equit funds. We also compare the predictive abilities of the Morningstar rating system with those of alternative predictors. The results indicate findings that are robust across different samples, ages and styles of funds, and performance measures. First, low ratings from Morningstar generally indicate relatively poor future performance. Second, there is little statistical evidence that Morningstar's highest-rated funds outperform the next-to-highest and median-rated funds. Third, Morningstar ratings, at best, do only slightly better than the alternative predictors in forecasting future fund performance.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 2000

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Footnotes

*

Blake, Graduate School of Business Administration, Fordham University, 113 West 60th St., New York, NY 10023; Morey, Lubin School of Business, Pace University, 1 Pace Plaza, New York, NY 10038. Morey acknowledges financial support from the Econoic and Pension Research Department of TIAA-CREF. We thank Will Goetzmann and Charles Trzcinka for data and Stephen Brown (the editor), Edwin Elton, Steve Foerster, Doug Fore, Martine Gruber, Mark Hulbert, Zoran Ivković (the referee), Richard C. Morey, Derricke Reagle, Emily Rosenbaum, H. D. Vinod, Mark Warshawsky, and Seminar participants at the Securities and Exchange Commission and the 1999 European Finance Association Meetings (Helsinki) for helpful comments and suggesions.

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