Summary
In this Research Dialogue, Professor Matthew Morey of Pace University presents a detailed analysis of the Morningstar star rating system for mutual funds. Professor Morey reviews how these ratings are constructed and illustrates several important implications of the way the ratings are generated. His discussion highlights aspects of these calculations that may be of great interest to many investors. He also examines an issue of extreme importance for individual investors: Can the Morningstar star ratings help predict future performance of mutual funds? Professor Morey's research illustrates that when it comes to choosing mutual funds (or indeed any investment), there are few easy answers. While it would be nice to have a simple, universal system to identify lucrative investments, there is just no substitute for thorough research, thoughtful consideration, and an individual's own unique evaluation of their personal goals and circumstances. While summary rating systems can provide some limited information to help with decision making, these data are only part of what is required to make an informed choice.
