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From Rising Stars and Falling Angels: On the Relation between Performance and Ratings of European Mutual Funds
Journal
Journal of Wealth Management
ISSN
1534-7524
Type
journal article
Date Issued
2010-07-01
Author(s)
Abstract
The aim of this article is to analyze the relationship between a fund's Morningstar rating and 1) its subsequent performance and 2) its rating and subsequent inflows or outflows of funds. The authors distinguish between actual and expected predictability as perceived by investors. This study is the first to analyze a prolonged investment period on the German market after Morningstar implemented essential changes in its rating methodology in 2002. The empirical findings suggest that the Morningstar rating has a limited ability to predict future fund quality for the German fund market and that the Sharpe ratio may be a better forecasting tool than the Morningstar rating, although neither is ultimately reliable. Furthermore, the fund flow performance relationship strongly depends on overall market movements. Highly rated funds suffered much greater outflows than lower-rated funds, especially during bear markets. An event study reveals, however, that investors do perceive rating changes as new information. German investors seem to react later than American investors, suggesting they are less influenced by Morningstar ratings in their allocation decisions.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Institutional Investor Journals
Publisher place
New York
Volume
13
Number
1
Start page
75
End page
90
Pages
16
Subject(s)
Division(s)
Eprints ID
216307