Morningstar's John Rekenthaler took a close look at
DFA [
profile] research that questions the predictability of past Morningstar ratings on future returns.
DFA used 14,822 U.S.-based mutual funds for the study, sorting the funds by Morningstar ratings at the end of 2007 and looked at the fund's rank among its peers over the next five years, Rekenthaler quotes from a recent
Huffington Post story. The DFA study found that 30 percent of funds, with no respect to category, didn't make it to the end of the five years, and those funds that did had a wide variety of ratings.
Rekenthaler writes that Morningstar's
Annette Larson duplicated the study and sorted funds by 2007 star ratings and calculated percentage of deaths by ratings. Then the Morningstar rating became predictive, with five-star funds dying at a rate of 10 percent, four-stars at 19 percent, right in order of number of stars down to a rate of 51 percent for single star funds, Rekenthaler writes.
Another interesting tidbit to take from his column? Funds with the lowest expenses had the lowest death rate, at 19 percent vs. the highest expense funds at 45 percent.
To read more, click
here.  
Edited by:
Casey Quinlan
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