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
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.
"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."
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.
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?
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.
Link to Morningstar Mirage via Twitter