The Star Rating at Its Best and Worst
The Morningstar Rating for funds worked well in some years and poorly in others.
Star rating class of 2004: Wow, you're doing a great job. Star rating class of 2007: What were you thinking?
Every year we update you on how the Morningstar Rating for funds is doing at predicting returns, risk, and even liquidation. We pull the star ratings from June 30 in each year and then look out to see how the funds in each rating group have done over the ensuing years. We look at the average returns for each star rating group by asset class, average performance rank within the category, and future three- and five-year ratings for each group.
We also look at the success ratio per star rating group in order to find out what percentage of funds outperformed and survived the whole ensuing time period. It's a way to keep extinct funds from being swept under the rug. Because 1-star funds are more likely to perform poorly and then be liquidated, the success ratio is a useful way to get a handle on how well the star rating really does.