http://www.theskilledinvestor.com/modules/smartsection/ Personal Finance, Investment Management, and Financial Planning -- What Does and Does Not Work! Thu, 09 Feb 2012 16:25:05 -0600 http://backend.userland.com/rss/ SmartSection Financial Articles > Mutual Fund Rating Services - Morningstar Star Ratings webmaster@theskilledinvestor.com webmaster@theskilledinvestor.com en http://www.theskilledinvestor.com/images/logo.gif http://www.theskilledinvestor.com/modules/smartsection/ 140 70 http://www.theskilledinvestor.com/ss.item.59/investment-astrology-should-you-pick-investments-according-to-the-morningstars.html Morningstar, Inc. first introduced its five star Morningstar Rating* system for funds in 1985. Individual investors and their advisors appear to make investment decisions that are heavily influenced by the Morningstar Rating system. Because the stars are very widely used and often misunderstood, The Skilled Investor has published a variety of articles to help investors make more rational decisions about the stars. http://www.theskilledinvestor.com/ss.item.59/investment-astrology-should-you-pick-investments-according-to-the-morningstars.html http://www.theskilledinvestor.com/ss.item.55/what-might-be-wrong-with-buying-a-mutual-fund-with-a-4-or-5-star-morningstar-rating.html The star ratings are oversimplified. Many investors and their advisors use the stars as their primary decision criterion and as shorthand for fund selection. Alternate, more sophisticated approaches are available, which are more likely to lead to optimal returns. http://www.theskilledinvestor.com/ss.item.55/what-might-be-wrong-with-buying-a-mutual-fund-with-a-4-or-5-star-morningstar-rating.html http://www.theskilledinvestor.com/ss.item.54/do-morningstar-ratings-predict-risk-adjusted-equity-mutual-fund-performance.html Morningstar Ratings have demonstrated some modest predictive information about performance. However, most individual investors will probably be very surprised about what kind of predictive information the stars provide. The stars have been a mild predictor of inferior performance. However, investors act as if the stars predict superior future performance, when in reality they seem to contain no such information. http://www.theskilledinvestor.com/ss.item.54/do-morningstar-ratings-predict-risk-adjusted-equity-mutual-fund-performance.html http://www.theskilledinvestor.com/ss.item.58/does-it-pay-to-trade-when-the-morningstar-rating-of-a-mutual-fund-changes.html A study found that active trading when Morningstar Ratings changed lead to positive pre-expense returns at all levels of star ratings changes. However, the “excess” returns to these strategies did not hold up once associated expenses were considered. Expenses for monitoring, trading, and paying taxes and loads easily outweighed any positive returns to these strategies. http://www.theskilledinvestor.com/ss.item.58/does-it-pay-to-trade-when-the-morningstar-rating-of-a-mutual-fund-changes.html http://www.theskilledinvestor.com/ss.item.57/do-mutual-fund-morningstar-ratings-changes-influence-individual-investors.html An analysis of the flow of investments into and out of mutual funds demonstrated a direct relationship between Morningstar Rating changes and investor reactions. Morningstar ratings upgrades resulted in positive abnormal mutual fund investment inflows, and downgrades caused lower than normal inflows or increased outflows. The dollar effects of ratings involving 4 and 5 stars we the strongest. http://www.theskilledinvestor.com/ss.item.57/do-mutual-fund-morningstar-ratings-changes-influence-individual-investors.html http://www.theskilledinvestor.com/ss.item.53/what-the-instability-of-mutual-fund-morningstar-ratings-means-for-long-term-investors-a-commentary.html If an investor expects the Morningstar star ratings to be stable, long-term indicators for long-term investing, then he probably will be quite disappointed by their lack of ratings persistence. Instead of the stars, The Skilled Investor recommends that investors give much higher priority to alternate metrics to screen mutual funds. http://www.theskilledinvestor.com/ss.item.53/what-the-instability-of-mutual-fund-morningstar-ratings-means-for-long-term-investors-a-commentary.html http://www.theskilledinvestor.com/ss.item.52/how-stable-have-morningstar-ratings-for-mutual-funds-been-over-time.html Morningstar Ratings have been quite unstable over time. If an investor buys a 4- or 5-star rated fund and expects it to stay that way, he is likely to be surprised. http://www.theskilledinvestor.com/ss.item.52/how-stable-have-morningstar-ratings-for-mutual-funds-been-over-time.html http://www.theskilledinvestor.com/ss.item.64/how-morningstar-ratings-for-mutual-funds-are-used-as-a-marketing-tool.html Mutual fund companies seem to exploit “four- and five-star only” investor beliefs. Advertising practices by mutual fund families are selective concerning which mutual fund star ratings they will advertise. You would be challenged to find any mutual fund family that advertises its one- or two-star rated funds, and the advertisement of a three-star fund is infrequent. http://www.theskilledinvestor.com/ss.item.64/how-morningstar-ratings-for-mutual-funds-are-used-as-a-marketing-tool.html http://www.theskilledinvestor.com/ss.item.56/high-morningstar-ratings-can-lure-you-into-mutual-funds-with-costly-sales-loads.html A loaded fund with a high star rating can cloud an investor’s judgment. A loaded fund with a 4- or 5- star rating is not likely to retain its high rating in the future. While loaded funds with high star ratings are good for sales advisor/agents on commission, they may not be the best funds for you. http://www.theskilledinvestor.com/ss.item.56/high-morningstar-ratings-can-lure-you-into-mutual-funds-with-costly-sales-loads.html http://www.theskilledinvestor.com/ss.item.66/simplifying-investment-decision-making-can-be-taken-too-far.html Individual investors are challenged to select among thousands of mutual funds. Investment decision simplification is a laudable goal, but only if it is done in a way that is more likely to enhance expected risk-adjusted investment returns. http://www.theskilledinvestor.com/ss.item.66/simplifying-investment-decision-making-can-be-taken-too-far.html