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Fund Flows Not Always Written in the Stars

Although 4- and 5-star funds see strong inflows, funds that have yet to receive a Morningstar Rating have attracted the most assets.

Mike Rawson: Investors tend to put their money in funds that have had good performance. So when we look at fund flows by star rating, we see that the 4- and 5-star funds attract a lot of assets, while there are actually outflows from 1- and 2-star funds.

It's important to remember that the star rating is a past risk-adjusted measure of performance. It's not an opinion about how well the fund is going to do in the future. This pattern of investors choosing funds that have had good recent performance, it really indicates a couple of things. First of all, it indicates that investors maybe have an easier time buying into a fund that has had good performance. If you're going to a financial advisor, it might be easier for him to sell a fund that has had good performance. That's the downside. The positive side is that funds that have had good past performance tend to be lower-cost. So investors may also be picking funds that have low costs, and those low-cost funds are more likely to have good performance in the future.

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