What Should Investors Care About? Mutual Fund Ratings by Analysts vs. Machine Learning Technique
70 Pages Posted: 1 Oct 2020 Last revised: 8 May 2021
Date Written: May 8, 2021
We examine two forward-looking mutual fund ratings provided by Morningstar: the analyst rating produced by human analysts and the quantitative rating generated by machine learning technique. The analyst rating identifies outperforming funds, while the quantitative rating fails to do so—such a difference is mostly due to the selection of analyst coverage. Moreover, the tone in the analyst report contains incremental soft information in predicting fund performance. Finally, retail investors do not follow analyst recommendations, but instead chase the quantitative rating. The overall evidence highlights the importance of mutual fund analysts in information production and implies a capital misallocation problem in mutual fund investment.
Keywords: Analyst Rating, Quantitative Rating, Mutual Funds, Information Provision, Fund Flows, Machine Learning
JEL Classification: G11, G23
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