A study of fund ratings services offered by Standard & Poors, Lipper, Morningstar and Aptimum, concludes that these fund ratings do not differentiate between market performance and managerial skill, making them unreliable and irrelevant.
The study by Edhec, a French business school, found that ratings do not take into account things like potential for extreme loss in a fund or the investment styles of funds. "The ratings do not take into account the real risk to which the funds are exposed, and therefore give irrelevant information on the risk-adjusted performance of the funds," said Noel Amenc, director of the Edhec Risk and Asset Management Research Centre, and joint author of the study.
The ratings were not based on a fund's real outperformance, the study suggested, because performance was assessed against an index related to the category it was allocated, rather than a benchmark representative of the risks taken.
As a result, the rankings given to funds did not judge a manager's asset allocation skills. They focused instead on the manager's exposure to one or more investment styles, "without it being possible to say whether this selection of risks over the long period is due to luck or skill," Amenc said.