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Selectivity, Market Timing and the Morningstar Star-Rating System

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  • Antonios Antypas
  • Guglielmo Maria Caporale
  • Nikolaos Kourogenis
  • Nikitas Pittis

Abstract

This paper evaluates the Morningstar mutual fund ranking system. We find that indeed higher Morningstar ratings are associated with higher returns on the portfolios including respectively five-, four-, three-, two- and one-star funds only (STAR5 to STAR1). We then perform an unconditional and conditional portfolio performance evaluation. In both cases the evidence suggests that the better performance of the STAR3, STAR4 and STAR5 categories reflects superior stock selection rather than market timing abilities. Overall, the implication for the Morningstar ranking system is that this is most effective in identifying the worst- performing funds (STAR1 or STAR2) rather than the best-performing ones.

Suggested Citation

  • Antonios Antypas & Guglielmo Maria Caporale & Nikolaos Kourogenis & Nikitas Pittis, 2009. "Selectivity, Market Timing and the Morningstar Star-Rating System," Discussion Papers of DIW Berlin 874, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp874
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    References listed on IDEAS

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    7. Hendricks, Darryll & Patel, Jayendu & Zeckhauser, Richard, 1993. "Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-1988," Journal of Finance, American Finance Association, vol. 48(1), pages 93-130, March.
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    Cited by:

    1. Otero-González, Luis & Durán-Santomil, Pablo, 2021. "Is quantitative and qualitative information relevant for choosing mutual funds?," Journal of Business Research, Elsevier, vol. 123(C), pages 476-488.

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    More about this item

    Keywords

    Mutual Fund; Morningstar Star-Rating System; CAPM; Conditional and unconditional portfolio performance evaluation;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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