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Rekenthaler Report

'Star Ratings Are Not Predictive'

Except that they are.

Say What?
I read last week in "Picking Mutual Funds: What Works and What Doesn't" (a Huffington Post blog by Dan Solin) that the Morningstar Rating for funds contains no information about the future. The article stated:

"Star Ratings Are Not Predictive
Recent research by Dimensional Fund Advisors casts serious doubt on the predictability of past star ratings on future returns. Dimensional looked at all 14,822 U.S.-based mutual funds and sorted them by their Morningstar rating at the end of 2007. It then plotted the performance of these funds over the subsequent five-year period based on each fund's percentile rank in its respective peer category. If a high star rating was predictive, you would expect high-star-rated funds to achieve high relative returns and lower-star funds to report lower relative performance.

Instead, the study found nearly 30% of the funds across all star ratings didn't even survive the subsequent five-year period. The funds that did survive displayed a broadly dispersed relative five-year performance. Based on this data, there does not appear to be reliable evidence that high star ratings are predictive of persistent outperformance."