The Predictive Performance of Morningstar's Mutual Fund Ratings

Abstract

With currently more than 17,000 mutual funds available, many investors are looking for tools to identify the best performing mutual funds. The most well-known fund rating system is provided by Morningstar Inc. This study investigates in a thorough empirical analysis the predictive performance of mutual fund ratings given by Morningstar over the course of a 10 year period beginning March 1995. From this analysis it becomes clear that the predictive performances of the different rating systems used by Morningstar do not beat a random walk. Furthermore, our results show that the latest amendment to the rating system, the introduction of 64 categories over four different asset classes, has reduced the predictive performance of the rating system as a whole.

Keywords: Predictive performance, Mutual funds, Morningstar 5-star rating system

JEL Classification: G11, G12, G14