Morningstar Mutual Fund Ratings Redux

27 Pages Posted: 20 Mar 2006

See all articles by Matthew R. Morey

Matthew R. Morey

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

Aron A. Gottesman

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

Date Written: January 2006

Abstract

We perform an extensive examination of how the new Morningstar rating system, introduced in June 2002, predicts future fund performance. Specifically, we examine all domestic equity funds that were rated by Morningstar as of June 30, 2002. We then examine the performance of these funds over the next three years, July 2002-June 2005. Using four different performance metrics, adjustments for loads, and three different methodologies for dealing with survivorship bias, we find widespread support for the notion that the new Morningstar rating system can predict future performance, at least within the first three years out-of-sample. Specifically, we find that higher rated funds, for the most part, significantly outperform lower rated funds. Moreover, the effect is relatively monotonic as even the next to lowest rated funds (2-star funds) significantly outperform the lowest rated funds (1-star funds). These results are quite different from those of Blake and Morey (2000) and Morey (2002b) which show that the older Morningstar rating system did not predict future performance well.

Keywords: Mutual Funds, Morningstar Ratings, Performance

JEL Classification: G23

Suggested Citation

Morey, Matthew R. and Gottesman, Aron A., Morningstar Mutual Fund Ratings Redux (January 2006). Pace University Finance Research Paper No. 2006/03. Available at SSRN: https://ssrn.com/abstract=890128 or http://dx.doi.org/10.2139/ssrn.890128

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/

Aron A. Gottesman

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

One Pace Plaza
New York, NY 10038
United States
212-346-1912 (Phone)
212-346-1573 (Fax)

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