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Funds Whose Star Ratings Could Jump--Or Fall

Ten-year anniversaries could lead to big changes in their ratings.

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The Morningstar Rating for funds is a great starting point for investors researching funds on their own. It measures risk-adjusted performance over three, five, and 10 years and--recognizing that investors' tolerance for losses often isn't as great as they think--punishes funds more for poor downside performance than it rewards them for huge returns in rallies. (Here's a link to the methodology behind the rating.) Thus, the star rating can help investors sort through the universe of funds and find those that make excellent long-term holdings.

However, funds that aren't quite 10 years old and have nine-year returns are sometimes likely to see big shifts. Since the funds' star ratings are based on three- and five-year returns at that point, they don't necessarily reflect how well or poorly the fund has done over its life span. Below, we take a closer look at notable funds that fit this profile and thus may deserve either more or less attention from investors than they're getting based on their star ratings.

 Dodge & Cox International Stock (DODFX)
Star Rating:3-Star Category Rank Over Nine Years--3%
This fund's risk-adjusted returns took a big hit when it lost a hefty 47% in 2008's sharp decline, in part because of the fund's big stake in emerging markets. But its managers' calls have often been spot-on; the fund has posted top-quartile showings in six of its first nine calendar years of operation. The fund actually hit its 10-year anniversary just a few days ago but won't get a 10-year star rating until the end of May. Although the fund has been more volatile than its typical foreign large-value peer, it probably will to earn a higher rating at the 10-year mark since it's beaten all but two of its category peers over the past decade.

Greg Carlson has a position in the following securities mentioned above: DODFX. Find out about Morningstar’s editorial policies.