{"id":1584,"date":"2011-11-18T08:16:20","date_gmt":"2011-11-18T16:16:20","guid":{"rendered":"\/blog\/?p=1584"},"modified":"2022-01-11T17:12:47","modified_gmt":"2022-01-12T01:12:47","slug":"morningstars-ranking-system-worthwhile","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/morningstars-ranking-system-worthwhile\/","title":{"rendered":"Morningstar\u2019s New Ranking System: Worthwhile?"},"content":{"rendered":"

<\/h1>\n

Morningstar debuted its new mutual fund ratings systems this week.<\/p>\n

Everyone\u2019s known for some time that the company\u2019s widely used star system for ratings doesn\u2019t work to predict future results any better than simply using funds\u2019 expense ratios. Morningstar itself acknowledged the fact that expense ratios are a better predictor of performance<\/a>.<\/p>\n

Even after that evidence, however, the Chicago-based company continued to use the stars, which are a signature of the company\u2019s brand. Mutual funds continued to use the stars to advertise. And harried investors, unfortunately, still make many investing decisions based on them.<\/p>\n

As The <\/em>Wall Street Journal<\/em><\/a> reported when it wrote about the new system,<\/p>\n

We still get calls that say, ‘Hey, why haven’t you gotten me out of this two-star fund?'” said Tim Courtney, chief investment officer of Oklahoma City-based wealth manager Burns Advisory Group Corp.<\/em><\/p>\n

Mr. Courtney said there was a widespread misperception among investors that the star ratings were meant to indicate a fund’s quality, and that he hopes the new system will help change that.<\/em><\/p>\n

The new system, which grants funds a gold, silver, bronze, neutral or negative ranking, is based \u201cin part on past performance, but also employs other quantitative and qualitative measures including the fund’s expense ratio, Morningstar’s perception of the fund manager, the fund’s parent company and the fund’s investment strategy,\u201d said The Wall Street Journal<\/em>.<\/p>\n

Morningstar admitted that its star system was not as good a predictor as expense ratios last year, winning praise from the media. Tara Siegal Bernard of The New York Times<\/em> called the company\u2019s acknowledgement \u201can act of radical transparency<\/a>.\u201d  Isn\u2019t that sort of like praising members of Congress for being extraordinarily transparent because they file reports on their insider trading \u2026 while they continue to do it<\/a>?<\/p>\n

As far back as 1999, academics had concluded Morningstar\u2019s star system was marginally valuable<\/a>, at best. Christopher R. Blake and Matthew R. Morey of Fordham University wrote that:<\/p>\n

First, low ratings from Morningstar generally indicate relatively poor future performance. Second, for the most part, there is little statistical evidence that Morningstar\u2019s highest-rated funds outperform the next-to-highest and median-rated funds. Third, Morningstar ratings, at best, do only slightly better than the alternative predictors in terms of predicting future fund performance.<\/em><\/p>\n

The question now for investors is whether to pay attention to the new ranking system (or keep paying attention to the old one). Why, given the company\u2019s track record, would an investor do that?<\/p>\n","protected":false},"excerpt":{"rendered":"

Morningstar debuted its new mutual fund ratings systems this week. Everyone\u2019s known for some time that the company\u2019s widely used star system for ratings doesn\u2019t work to predict future results any better than simply using funds\u2019 expense ratios. Morningstar itself acknowledged the fact that expense ratios are a better predictor of performance. Even after that […]<\/p>\n","protected":false},"author":43,"featured_media":7217,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1315,1282],"tags":[1608,1549,1292,1309],"coauthors":[84],"class_list":["post-1584","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-industry-insights","category-investing","tag-fordham-university","tag-morningstar","tag-mutual-funds","tag-wall-street"],"acf":[],"yoast_head":"\nMorningstar\u2019s New Ranking System: Worthwhile? | Wealthfront<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/canary.kcprod.info/blog\/morningstars-ranking-system-worthwhile\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Morningstar\u2019s New Ranking System: Worthwhile? | Wealthfront\" \/>\n<meta property=\"og:description\" content=\"Morningstar debuted its new mutual fund ratings systems this week. 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