Selectivity, Market Timing and the Morningstar Star-Rating System

CESifo Working Paper Series No. 2580

DIW Berlin Discussion Paper No. 874

27 Pages Posted: 16 Mar 2009

See all articles by Antonios Antypas

Antonios Antypas

University of Piraeus - Department of Banking and Financial Management

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Nikolaos Kourogenis

University of Piraeus, Department of Banking and Financial Management

Nikitas Pittis

University of Piraeus - Department of Banking and Financial Management

Date Written: April 1, 2009

Abstract

This paper evaluates the Morningstar mutual fund ranking system. We find that indeed higher Morningstar ratings are associated with higher returns on the portfolios including respectively five-, four-, three-, two- and one-star funds only (STAR5 to STAR1). We then perform an unconditional and conditional portfolio performance evaluation. In both cases the evidence suggests that the better performance of the STAR3, STAR4 and STAR5 categories reflects superior stock selection rather than market timing abilities. Overall, the implication for the Morningstar ranking system is that this is most effective in identifying the worst-performing funds (STAR1 or STAR2) rather than the best-performing ones.

Keywords: mutual fund, Morningstar Star-Rating System, CAPM, conditional and unconditional portfolio performance evaluation

JEL Classification: G23

Suggested Citation

Antypas, Antonios and Caporale, Guglielmo Maria and Kourogenis, Nikolaos and Pittis, Nikitas, Selectivity, Market Timing and the Morningstar Star-Rating System (April 1, 2009). CESifo Working Paper Series No. 2580. Available at SSRN: https://ssrn.com/abstract=1360637 or http://dx.doi.org/10.2139/ssrn.1360637

Antonios Antypas

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

Kingston Lane
Marie Jahoda Building
Uxbridge, Middlesex UB8 3PH
United Kingdom
+44 1895 266713 (Phone)
+44 1895 269770 (Fax)

HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Nikolaos Kourogenis

University of Piraeus, Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Nikitas Pittis

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

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