We find the star rating has been a useful starting point, and the Analyst Rating, while newer, has also exhibited predictive power.
Today, The Wall Street Journal ran a story profiling Morningstar. We wanted to make you aware of the story, which makes a number of concerning assertions about the Morningstar fund ratings that we publish, among other claims. In this piece, I'll aim to constructively set the record straight.
The Wall Street Journal claims that our ratings, including the Morningstar Rating for Funds (the "star rating") and the Morningstar Analyst Rating have not succeeded. The Journal's analysis, which we disagree with, suggests that highly rated funds do not outperform low-rated funds in the future. However even using the Journal’s own findings, which were selectively disclosed in the feature article that ran today, we find that highly rated funds were far more likely to outperform low-rated funds in the future.
We've long believed in the merit of the straightforward, transparent approach the star rating takes to ranking funds: It's an objective "report card" on funds' past performance. By the same token, we've frequently acknowledged the star rating's limitations, which are common to any measure that relies on past performance. Since launching the star rating in 1985, we've augmented it with a host of other tools and measures and made enhancements to our methodology several times along the way, the forward-looking Morningstar Analyst Rating being a signal example.
We've encouraged users to consider combining the star rating with other data and measures to aid in fund selection. In this way, users could benefit from some of the star rating's more distinctly valuable features--that is, the way it emphasizes longer time frames, accounts for risk, and measures performance after fees and charges, considerations that don't normally figure into "leaders and laggards" tallies--while leveraging other forward-looking measures like the Morningstar Analyst Rating. In that context, we've often described the star rating as a potential starting point for research.
Star Rating Performance
We've run several recent studies on the performance of the star rating. You can find them here: "Does the Star Rating for Funds Predict Future Performance?" and "The Morningstar Rating for Funds: A Good Starting Point for Research."
To summarize, what we found is that the star rating possesses moderate predictive power, which is what we'd expect of a starting point for research. It points investors toward cheaper funds that are easier to own and more likely to outperform in the future, qualities that correspond with investor success.
You wouldn't know that from reading The Wall Street Journal piece, which portrays the star rating as ineffective in tilting the odds in investors' favor. But the Journal's own analysis largely corroborates what we found in our own tests of the rating's performance: The odds of success were much higher in high-rated funds than low-rated funds, as shown in a panel of the Journal's analysis (which wasn't included in the feature piece):