Kiss of Death: A 5-Star Morningstar Mutual Fund Rating?

18 Pages Posted: 28 Oct 2003

See all articles by Matthew R. Morey

Matthew R. Morey

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

Date Written: September 2003

Abstract

We examine the effect that an initial 5-star Morningstar mutual fund rating has on future fund performance, strategy, risk-taking, expenses, and portfolio turnover. Using a sample of diversified domestic equity funds from the 1990s we find that three-years after a fund received its initial 5-star rating, fund performance severely falls off. This result is robust across different performance measures and different samples of funds. We also find that after receiving their initial 5-star rating, the risk levels of funds rise and that the funds are not able to load on momentum stocks as well as they did before receiving the 5-star rating. These results suggest that funds, to some degree, alter their portfolios after receiving a 5-star rating and that investors should be very wary about using the 5-star rating as a signal of future 3-year performance.

Keywords: Mutual Funds, Morningstar, Fund Ratings, Performance persistence

JEL Classification: G23

Suggested Citation

Morey, Matthew R., Kiss of Death: A 5-Star Morningstar Mutual Fund Rating? (September 2003). Available at SSRN: https://ssrn.com/abstract=455240 or http://dx.doi.org/10.2139/ssrn.455240

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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