Star Rating, Fund Flows and Performance Predictability - Evidence from Norway

34 Pages Posted: 9 Oct 2019 Last revised: 30 Apr 2020

See all articles by Linn K. Aasheim

Linn K. Aasheim

Instituto Universitário de Lisboa - ISCTE-IUL

Antonio F. Miguel

Instituto Universitário de Lisboa (ISCTE - IUL)

Sofia Brito Ramos

ESSEC

Date Written: April 28, 2020

Abstract

This paper studies the effect of Morningstar ratings on fund flows and fund performance predictability using a proprietary data set of equity funds from Norway. Controlling for a number of variables proxying for fund and firm visibility, we find that fund flows respond asymmetrically to changes in Morningstar ratings. Specifically, 4- and 5-star rated funds get more flows, and funds upgraded to 5-star get significantly more flows not only in the next month, but also over the following 12 months. Downgraded funds suffer outflows, but the results are not statistically significant. We also find evidence of long-term performance predictability for top-rated funds. As the mutual fund industry develops worldwide, our results suggest that Morningstar has been successful in bringing its brand name to markets outside the United States, and that Morningstar ratings are a valuable tool for helping investors make strong investment decisions.

Keywords: Mutual funds; Morningstar ratings; Fund flows; Fund performance; Investor behavior

JEL Classification: G15;G23

Suggested Citation

Aasheim, Linn K. and Miguel, Antonio Freitas and Ramos, Sofia Brito, Star Rating, Fund Flows and Performance Predictability - Evidence from Norway (April 28, 2020). Available at SSRN: https://ssrn.com/abstract=3460883 or http://dx.doi.org/10.2139/ssrn.3460883

Linn K. Aasheim

Instituto Universitário de Lisboa - ISCTE-IUL ( email )

Portugal

Antonio Freitas Miguel (Contact Author)

Instituto Universitário de Lisboa (ISCTE - IUL) ( email )

Av. das Forcas Armadas
Lisboa, 1649-026
Portugal
+351 217 903 000 (Phone)

Sofia Brito Ramos

ESSEC ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

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