Changes to Morningstar Star Ratings Over Time
Chart of the Week for June 6, 2008 - June 12, 2008
When selecting investments, it is important not to overemphasize only one factor such as the Morningstar star rating1, which focuses on past performance. Selecting investments is about future expectations rather than the past. How did today's top Morningstar rated mutual funds rate in the past? To examine this question, we researched how mutual funds rated 4 and 5 stars, as of May 31, 2008 by Morningstar, were rated five years ago (May 2003) and included only the oldest share class of funds with at least 5 years of performance in the Morningstar Large-Cap Value, Growth, and Blend categories.
Our findings brought to light the difficulty investors may have finding a fund with a long-term top rating based solely on the current rating. For instance, less than 30% of funds currently rated 5 stars had a 5 star rating five years ago and more than four in ten funds were rated less than 4 stars as of May 2003. The 4 star group performed more consistently with roughly 55% of funds rated 4 stars five years ago still rated 4 stars or over. Of course, that still leaves four of out ten funds rated 3 stars or less. Based on this historical data, it is difficult for investors to pick a consistent 4 or 5 star fund based on ratings alone.
Morningstar ratings are an important consideration for investors but should not be the only factor when selecting investments.
1For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. Past performance is no guarantee of future results.
This illustration was compiled by information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing.
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The performance data quoted represents past performance. Past performance is no guarantee of future results. Investment returns and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data illustrated. For performance data current to the most recent month end, contact ICMA-RC Services, LLC by calling 1-800-669-7400 or by writing to 777 North Capitol Street, NE, Washington, DC 20002-4240. Para asistencia en Español llame al 1-800-669-8216. Performance data current to the most recent quarter end is available by visiting www.icmarc.org.