Although Morningstar warns against choosing funds solely on its star rating, many investors do just that in their quest for higher returns.This chart documents the challenge based simply on Morningstar rating. The top chart displays all US-based mutual funds (14,822 funds) sorted by their Morningstar rating at the end of 2007. The bottom chart plots performance of these funds over the subsequent five-year period based on each fund’s percentile return rank in its respective peer category.
If funds with high star ratings could repeat their historical top relative performance in the future, the data in the bottom chart would demonstrate this, in stair-step fashion. The actual data tell a different story.
Note also that nearly one third of funds across all star ratings failed to survive the subsequent five-year period, as indicated by the Dead Funds sort (4,269 funds). These results are consistent with fund performance research 1
1 Christopher R. Blake and Matthew R. Morey, “Morningstar Ratings and Mutual Fund Performance,”Working Paper, March 15, 1999.
Charts provided by Dimensional Funds
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