'Star Ratings Are Not Predictive'

Except that they are.

John Rekenthaler 18 September, 2013 | 10:19
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I read a few weeks ago 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.


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John Rekenthaler  is vice president of research for Morningstar.

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