The Persistence of Morningstar Ratings

Warshawsky, Mark; DiCarlantonio, Mary; Mullan, Lisa
September 2000
Journal of Financial Planning;Sep2000, Vol. 13 Issue 9, p110
Academic Journal
This article focuses on a study which examined the persistence of Morningstar four- and five-star ratings among mutual funds and variable annuities during the period of 1997-1999 in the U.S. According to the Flow of Funds Accounts of the U.S. Federal Reserve Board, in 1998, purchases of mutual fund shares represented more than three-fifths of the net acquisition of financial assets by households. Investors and their advisors are more and more in need of valid, unbiased and yet straightforward information to enable them to select the mutual funds and variable annuities with the best prospects for the highest possible investment returns. This need for information has led to services that rate funds and variable annuities. Nevertheless, it is likely that investors using the star system will avoid funds with the lowest ratings and choose funds with the highest ratings precisely in the expectation that they will increase the future returns received on their investments. Just as it is logical and natural for investors to look for mutual funds and variable annuities with the highest ratings when purchased, it is also natural for them to sell those funds that have been downgraded and to keep those funds that maintain the highest ratings.


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