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John Waggoner: Morningstar-WSJ Feud Gives CFRA Opening To Challenge Bigger Rival's Methodology
I think Morningstar's been pretty clear about the star-rating being backward looking and of limited use for quite some time. So this analysis seems a little unfair to me. What maybe they should do though to really formalize the distinction is to refuse to allow fund companies to use the star rating in their advertising. If you think about it historically, the star rating was a modest step forward for investor education in that it A. incorporated the notion of risk adjusted return, which investors rarely think of still today, and B. it ultimately though not originally incorporated the notion of comparing funds to funds of their own category so a tech fund shouldn't be compared to a broadly diversified U.S. stock fund but to other tech funds' risk adjusted returns. Those are helpful for investor education even if the metric itself now seems dated. The problem I think is the star-rating's exploitation as a fund company marketing tool. Too many fund companies emblazon "five stars" in their advertising and that's misleading as to what the metric really means.
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