While Advisor Perspectives, a consulting firm that specializes in high-net-worth investors, maintains that Morningstar’s star rating system works broadly well over a three-year period, it’s inconsistent across investment categories, Dow Jones reports.
Advisor Perspectives found that the probability of five-star rated bond funds beating four-star rated bond funds is 63%, but that declines to 59% for balanced funds, to 55% for U.S. equity funds and to 48% for international equity funds.
Advisor Perspectives also said that returns on highly rated U.S. stock funds over a three-year period were slightly lower than index funds.
But pointing to the differences between five-star and one-star funds, Morningstar believes otherwise. John Rekenthaler, vice president of research at Morningstar, said, “The star ratings are a good starting point. In some cases, as much as 80% of five-star funds outperformed one-star funds over the next time period.”
Steve Persky, managing partner with Dalton Investments, shot back: “The industry is trying to sell a lot of sizzle, but it’s really a lot of hype. In reality, star ratings have little value to long-term investors.”