Morningstar Ratings and Mutual Fund Performance

53 Pages Posted: 31 Jul 1999

See all articles by Christopher R. Blake

Christopher R. Blake

Fordham University - Gabelli School of Business

Matthew R. Morey

Pace University - Lubin School of Business - Department of Finance and Economics

Date Written: March 15, 1999

Abstract

This study examines the degree to which the well-known Morningstar rating system is a predictor of out-of-sample mutual fund performance, an important issue given that high-rated funds receive the lion's share of investor cash inflow. We use a data set based on growth mutual funds that is free from survivorship bias and adjusted for load fees to examine the predictive qualities of the rating system. Moreover, we use various performance metrics over different time horizons and sample periods. We also compare the predictive qualities of the Morningstar rating system with those of a "naive" predictor: simple historical average monthly returns. The results indicate three main findings. First, low ratings from Morningstar generally indicate relatively poor future performance. Second, for the most part, there is little statistical evidence that Morningstar's highest-rated funds outperform the next-to-highest and median-rated funds. Third, Morningstar ratings do no better than the "naive" predictor for predicting fund performance.

JEL Classification: G23, G2

Suggested Citation

Blake, Christopher R. and Morey, Matthew R., Morningstar Ratings and Mutual Fund Performance (March 15, 1999). Available at SSRN: https://ssrn.com/abstract=168668 or http://dx.doi.org/10.2139/ssrn.168668

Christopher R. Blake

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Lowenstein Building
New York, NY 10023
United States
212-636-6750 (Phone)

Matthew R. Morey (Contact Author)

Pace University - Lubin School of Business - Department of Finance and Economics ( email )

One Pace Plaza
New York, NY 10038-1502
United States
212-618-6471 (Phone)

HOME PAGE: http://webpage.pace.edu/mmorey/

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