The Star Rating Gains Momentum
We evaluate the star rating as a predictor of future returns.
The following is adapted from an article that originally appeared in Morningstar FundInvestor.
We launched the revised Morningstar Rating for funds in 2002, and each year since then we've updated a study on how the rating has performed. For background, the rating is a quantitative measure of risk-adjusted performance relative to a category over the past three-, five-, and 10-year periods.
For this year we look at how the ratings as of June 2002, June 2003, and June 2004 have fared at predicting relative performance and future star ratings. Now that the ratings are four years old and we're on to our third study, we can be more certain about how it's working. Fund investing is about long-term success, so the best measure of the star rating will be long-term performance. We are starting to get there with four-year returns, but we're still a ways away. We looked at shorter periods, too, for purposes of tracking how the rating is faring, but we do not want to read too much into two-year returns.