In a recent article, Bloomberg columnist Nir Kaissar challenges the rationale of a Wall Street Journal article suggesting that Morningstar mutual fund ratings lead investors to “assume erroneously” how those funds will perform in the future.
“That analysis is flawed,” Kaissar writes. “Morningstar awards stars for beating peers, not the market. Given that the vast majority of funds lose to the market, highly rated funds may not be delivering any value to investors. Buying the best poorly performing fund is cold comfort,” he writes.
Kaissar suggests that a more helpful exercise would be to gauge whether funds with high ratings are more likely to beat their benchmark, which Morningstar undertook last year. The findings, he says, are “inconclusive. They show that highly rated funds are modestly more likely to outperform than lower rated funds. But the results are not significant in many cases, which means they may just be the outcome of random chance.”
Morningstar argues that their ratings aren’t intended to be used as a predictive tool, to which Kaissar quips, “But let’s be serious: Investors chase actively managed funds because they hope to beat the market.” He explains that Morningstar introduced a more qualitative system in 2011 (assigning levels such as gold, silver, and bronze ratings) but argues that it isn’t any more useful to investors.
Instead, Kaissar suggests, “Morningstar should offer a curated menu of fund data and let investors decide which funds are best.”