The Kiss of Death: A 5-Star Morningstar Mutual Fund Rating?

Posted: 29 Apr 2005

See all articles by Matthew R. Morey

Matthew R. Morey

Pace University - Lubin School of Business - Department of Finance and Economics

Abstract

We examine the effect that an initial 5-starMorningstar mutual fund rating has on future fund performance, strategy, risk-taking, expenses, and portfolio turnover. Using a sample of diversified domestic equity funds from the 1990s we find that during the 3 years after a fund received its initial 5-star rating, fund performance severely falls off. This result is robust across different performance measures and different samples of funds. We also find that after receiving their initial 5-star rating, the risk levels of funds rise and the funds are not able to load on momentum stocks as well as they did before receiving the 5-star rating. These results suggest that funds, to some degree, alter their portfolios after receiving a 5-star rating and that investors should be very wary about using the 5-star rating as a signal of future 3-year performance.

Keywords: Mutual funds, Morningstar, fund

JEL Classification: G00

Suggested Citation

Morey, Matthew R., The Kiss of Death: A 5-Star Morningstar Mutual Fund Rating?. Journal of Investment Management, Vol. 3, No. 2, Second Quarter 2005, Pace University Finance Research Paper No. 2005/01, Available at SSRN: https://ssrn.com/abstract=712187

Matthew R. Morey (Contact Author)

Pace University - Lubin School of Business - Department of Finance and Economics ( email )

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HOME PAGE: http://webpage.pace.edu/mmorey/

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