Mutual funds and Morningstar?

Question

I am trying to figure out how Morningstar rates mutual funds (STARS). I have been looking for something- expense ratio, past performance, experience of manager, and I am lost. Does anyone know what they are rating the funds on? Are they getting paid for good ratings?

I appreciate your answers!

Answer 1

Bottom line;

The "star" rating is only part of the picture.  I belong to the Morningstar Premium Service.  This gives the full picture.

BTW: Morningstar is independent & does not get reimbursed by anyone or any mutual funds.

Answer 2

Morningstar is an independent analyst meaning they do not receive money from funds or brokerages.  Furthermore, their analysts are prohibited from owning the securities they cover.

The star rating is a reflection of the risk adjusted return. A fund with high returns but above average risk receive a lower rating than low risk funds with high returns etc. Funds open less than 3yrs are not rated.  Click on the data interpreter tab for more info on the rating for a particular fund.

The star ratings are helpful, but they don't tell you much without the analyst report (available only to paid subscribers).  You can order a free 14 day trial, and I strongly recommend taking a test drive.  Paid subscribers also have access to their top fund picks by investment style (large cap value, foreign large blend, natural resources, etc.).

Reading the analyst reports will give you better insight into their ratings scheme.

Answer 3

From their webiste:  "Morningstar rates mutual funds from one to five stars based on how well they've performed (after adjusting for risk and accounting for all sales charges) in comparison with similar funds."

But I've never found anything that actually details their formula.  Probably they keep it internal, and probably even tweak it from time to time.  I doubt they are getting paid for ratings, because if they were and word ever got out, they would go bust the next day and be on the receiving end of a lot of lawsuits.

One thing to remember is that their ratings are partly based on recent (past) performance.  Most mutual funds have good periods where they outperform the markets, and bad periods where they underperform it.  But if they all end up relatively average in the end, sometimes they get a high star rating from a recent good period, and then go into a bad period.  In the long run they were average, and you just happened to get in at the wrong time because they've looked so good recently.