The Predictive Performance of Morningstar's Mutual Fund Ratings

29 Pages Posted: 20 Feb 2007 Last revised: 10 Mar 2023

See all articles by Roman Kräussl

Roman Kräussl

Bayes Business School (formerly Cass); Hoover Institution, Stanford University

Ralph M. R. Sandelowsky

University of Amsterdam

Date Written: August 17, 2007

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

Suggested Citation

Kraeussl, Roman and Sandelowsky, Ralph M. R., The Predictive Performance of Morningstar's Mutual Fund Ratings (August 17, 2007). Available at SSRN: https://ssrn.com/abstract=963489 or http://dx.doi.org/10.2139/ssrn.963489

Roman Kraeussl (Contact Author)

Bayes Business School (formerly Cass) ( email )

Hoover Institution, Stanford University ( email )

Stanford, CA 94305
United States

Ralph M. R. Sandelowsky

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

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