An Analysis of Morningstar's Classification of Small-Cap Mutual Funds
Brian R. Bruce, ed., A Guide to Small-Cap Investing, New York, NY: Institutional Investor, pp. 69-74, Spring 2003
6 Pages Posted: 2 Jul 2008 Last revised: 26 May 2015
Date Written: May 24, 2015
Abstract
With respect to its small-cap funds, the Morningstar category rating is preferred to the Morningstar star rating with respect to the preponderance of its associations with both the Jensen Alpha and Sharpe Index. But, neither captures the entirety of the Sharpe Index and, especially, the Jensen Alpha to assess fully composite risk/return performance. This is especially true for the Morningstar star rating. The Morningstar category rating is thus preferred to the Morningstar star rating as a composite risk/return measure of fund performance. But, neither rating variable is generally associated with differences in investment style variables that profile value and growth. And, neither rating variable is associated with beta and R2 performance variables.
Keywords: mutual funds, Morningstar small-cap funds, star rating, category rating, risk/return performance, investment style, performance clusters
JEL Classification: G2, G23, G28
Suggested Citation: Suggested Citation