In a thought provoking and insightful piece, noted industry journalist Chris Carosa tackles the controversial question of whether the Morningstar star ratings are useful in predicting performance. If they're not, the almost parochial reliance on these ratings by plan sponsors and advisors is really just a fiduciary hedge.
Reacting to Carosa’s Jan. 14 column, “Have Mutual Fund Ratings Lost their Mojo?,” advisors and Morningstar officials chimed in on the discussion. Morningstar conceded that before they changed their system in 2002, their ratings had no predictive value. But there’s evidence showing that even after the change, the ratings have limited or no value, a point conceded by Morningstar President Don Phillips in 2010. In fact, one advisor’s analysis showed that expense ratios were a better predictor.
But Morningstar officials still believe the value of their ratings in predicting future performance, stating, “Morningstar’s star rating doesn’t ‘guarantee’ any results, but because high ratings are given to funds with low cost, low risk, and long manager tenure, they tend to highlight funds with a higher likelihood of better performance.” What’s your opinion?
