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Morningstar Mirage

https://www.wsj.com/articles/the-morningstar-mirage-1508946687

(hope it will open for non subscribers)

'A Wall Street Journal analysis of Morningstar mutual-fund ratings over 14 years found that top-rated funds drew the vast majority of investor dollars, but most didn’t continue performing at that level. Morningstar said it has never billed its ratings as predictive and they should be a starting point for investors selecting funds.

"Of funds awarded a coveted five-star overall rating, only 12% did well enough over the next five years to earn a top rating for that period; 10% performed so poorly they were branded with a rock-bottom one-star rating."

There is a little consistency Five star funds averaged 3 stars in 10 years, 4 stars ave 2.8 three stars 2.5 and two stars 2.2

Thank god there is no "Snowball mirage" !


Comments

  • edited October 2017
    Can't open it, but if the quoted text is indicative of what's in the article, all the analysis shows is that mean reversion is alive and well at some level - not exactly a brilliant revelation.

    The comment by M* about its star ratings is correct; those ratings are based on past risk-adjusted return, and as everyone knows, or should know, past performance is no indication of yadda yadda.

    If the WSJ wants to grade M* on recommendations, I say go for it, I'm sure there's meat there, but star ratings aren't the place to look - the right data set to jump into is the company's history of fund analyst ratings, now set up as medal ratings.
  • edited October 2017
    A few excerpts from the WSJ article:

    "A study published by Morningstar last month said the stars point investors to funds “likelier to outperform in the future.”

    "Morningstar founder Joe Mansueto said... that the firm’s analysis of past ratings found “some modest predictive value.” Chief Executive Kunal Kapoor... called the star system “a better predictor than it ever has been.”

    "In its written statement to the Journal, Morningstar said its analysis has found “the Star Rating is moderately predictive,” which “conforms to what we’d expect of a backward-looking, entirely quantitative measure.”

    "The Journal’s analysis found that most five-star funds perform somewhat better than lower-rated ones, yet on the average, five-star funds eventually turn into merely ordinary performers."


    Pretty much nothing new here. All of this has been discussed on FundAlarm and MFO for many years. As Andy says, above, "all the analysis shows is that mean reversion is alive and well at some level - not exactly a brilliant revelation."
  • I agree but I do not think that is the general opinion of most people and financial advisers and certainly not what is in most advertisements for mutual funds. M* ratings are usually the only featured information piece of any fund ad. Most people think they will predict future performance.
  • edited October 2017
    sma3 said:

    I agree but I do not think that is the general opinion of most people and financial advisers and certainly not what is in most advertisements for mutual funds. M* ratings are usually the only featured information piece of any fund ad. Most people think they will predict future performance.

    @sma3, I understand, but the ads I see like that are in the print edition of Barron's, and I've never seen one that didn't include a note with a description of what the star ratings are. I guess most people need to learn to read the notes. It's probably confusing since star ratings in other walks of life (movies, books, etc.) are clearly opinions.

    In any case, the star ratings are still the wrong data set if evaluating M*'s forward-looking ratings of funds is the objective.

    @old_joe, thanks for the additional excerpts for us non-subscribers.
  • You betcha! (in memory of Lou Rukeyser)
  • The user and all related content has been deleted.
  • I could not access the article, but I am curious about where the new 5 star funds come from. How many come from new funds turning 3 years old? From the stats furnished by @sma3, it looks like the old funds did worse (on average) after 10 years. The only exception is the 2* funds went up to 2.2* after 10 years. Do these stats factor in suvivorship bias? I would deduce that newer funds are the way to go, before they turn 3.
  • @sma3, what does this mean:
    There is a little consistency Five star funds averaged 3 stars in 10 years, 4 stars ave 2.8 three stars 2.5 and two stars 2.2
    It is not clear to me what you are saying.

    I just checked my Schwab account, and I have nothing but 4 and 5 star funds. Should I be worried? Should I sell FMIJX, PONDX, GTLOX, SGENX or DSENX?
  • edited October 2017
    I ignore Morningstar. But then, I ignore most “authority” figures.

    Geez - What’s wrong with reading the Prospectus and the most recent Fund Report to see if you can live with the stated fees, have confidence in their investment approach, and desire to own the assets the fund holds?

    Oh - Almost forgot: The Prospectus shows the fund’s returns for the past 10 years - which ought to prevent even the least circumspect of individuals from bumbling into something like HSGFX.
  • edited November 2017
    LINK to WSJ Morningstar Mirage Article

    Link to Morningstar Mirage via Twitter
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