Hostname: page-component-78c5997874-j824f Total loading time: 0 Render date: 2024-11-15T06:46:46.576Z Has data issue: false hasContentIssue false
  • English
  • Français

Morningstar Ratings and Mutual Fund Performance

Published online by Cambridge University Press:  06 April 2009

Christopher R. Blake  and
Matthew R. Morey
Get access Rights & Permissions [Opens in a new window]

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
Information
Journal of Financial and Quantitative Analysis , Volume 35 , Issue 3 , September 2000 , pp. 451 - 483
Copyright
Copyright © School of Business Administration, University of Washington 2000

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

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.

References

Bawa, V. S., and Lindenberg, E. B.. “Capital Market Equilibrium in a Mean-lower Partial Moment Framework.” Journal of Financial Economics, 5 (1977), 189–200.10.1016/0304-405X(77)90017-4CrossRefGoogle Scholar
Blume, M. “An anatomy of Morningstar Ratings.” Financial Analysts Journal (03/04 1998), 19–27.CrossRefGoogle Scholar
Brown, S. J. “Mutual Fund Styles.” Conference Proceedings from Computational Finance Conference, New York Univ. (01 6–8, 1999).Google Scholar
Brown, S. J., and Goetzmann, W.. “Performance Persistence.” Journal of Finance, 50 (1995), 679–698.10.2307/2329424CrossRefGoogle Scholar
Brown, S. J., and Goetzmann, W.. “Mutual Fund Styles.” Journal of Financial Economics, 43 (1997), 373–399.10.1016/S0304-405X(96)00898-7CrossRefGoogle Scholar
Brown, S. J.; Goetzmann, W. M.; Ibbotson, R. G. and Ross, S.. “Survivorship Bias in Performance Studies.” Review of Financial Studies, 5 (1992), 553–580.10.1093/rfs/5.4.553CrossRefGoogle Scholar
Carhart, M. M. “On the Persistence Of Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.10.2307/2329556CrossRefGoogle Scholar
Damato, K. “Morningstar Edges Toward One-Year Ratings.” Wall Street Journal (04 5, 1996), C1.Google Scholar
Elton, E. J.; Gruber, M. J. and Blake, C. R.. “The persistence of Risk-Adjusted Mutual Fund Performance.” Journal of Business, 69 (1996a), 133–157.10.1086/209685CrossRefGoogle Scholar
Elton, E. J.; Gruber, M. J. and Blake, C. R.. “Survivorship Bias and Mutual Fund Performance.” Review of Financial Studies, 9 (1996b), 1097–1120.10.1093/rfs/9.4.1097CrossRefGoogle Scholar
Elton, E. J.; Gruber, M. J.; Das, S. and Hlavka, M.. “Efficiency with Costly Information: A Reinterpretation of Evidence from Managed Portfolios.” Review of Financial Studies, 6 (1993), 1–22.10.1093/rfs/6.1.1CrossRefGoogle Scholar
Goetzmann, W. N., and Ibbotson, R. G.. “Do Winners Repeat?” Journal of Portfolio Management (Winter 1994), 9–18.CrossRefGoogle Scholar
Goetzmann, W. N., and Peles, N.. “Cognitive Dissonance and Mutual Fund Investors.” Journal of Financial Research, 20 (1997), 145–158.CrossRefGoogle Scholar
Gruber, M. J. “Another Puzzle: The Growth in Actively Managed Mutual Funds.” Journal of Finance, 51 (1996), 783–810.10.2307/2329222CrossRefGoogle Scholar
Hendricks, D.; Patel, J. and Zeckhauser, R.. “Hot Hands in Mutual Funds: Short-Run Persistence of Relative Persformance, 1974–1988.” Journal of Finance, 48 (1993), 93–130.10.2307/2328883Google Scholar
Jaffe, C. “Rating the Raters: Flaws Found in Each service.” Boston Globe (08 27, 1995), 78.Google Scholar
Jensen, M. “The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance, 23 (1968), 389–416.10.2307/2325404Google Scholar
Khorana, A., and Nelling, E.. “The Determinants and Predictive Ability of Mutual Fund Ratings.” The Journal of Investing (11 1998), 61–66.CrossRefGoogle Scholar
Lallos, L. Morningstar Newsletter. Chicago, IL: Morningstar Inc. (1997).Google Scholar
Malkiel, B. G. “Returns from Investing in Equity Mutual Funds 1971 to 1991.” Journal of Finance, 51 (1995), 783–810.Google Scholar
Markowitz, H. M. Portfolio Selection: Efficient Diversification of Investments. Cambridge, MA: Basil Blackwell, Inc. (1959).Google Scholar
Morey, M. R., and Morey, R. C.. “A Mutual Performance Appraisals: A Multi-Horizon Perspecive with Endogenous Benchmarking.” Omega: The International Journal of Management Science, 27 (1999), 241–258.10.1016/S0305-0483(98)00043-7CrossRefGoogle Scholar
Morningstar Principia Manual. Chicago, IL: Morningstar Publications (1998).Google Scholar
Rea, J. D., and Reid, B. K.. “Trends In The Ownership Cost of Equity Mutual Funds.” Investment Company Institute Perspective, 4 (Nov. 1998) 1–15.Google Scholar
Sharpe, W. “Mutual Fund Performance.” Journal of Business, 39 (1966), 119–138.10.1086/294846CrossRefGoogle Scholar
Sharpe, W.. “Asset Allocation: Management Style and Performance Measurement.” Journal of Portfolio Management (Winter 1992), 7–19.CrossRefGoogle Scholar
Sharpe, W.. “Morningstar Performance Measures.” Financial Analysts Journal (07/08 1998), 21–33.CrossRefGoogle Scholar
Sirri, E. R., and Tufano, P.. “Costly Search and Mutual Fund Flows.” Journal of Finance, 53 (1998), 1589–1622.10.1111/0022-1082.00066CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.10.2307/1912934CrossRefGoogle Scholar