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Top Rated Funds Deliver Superior Performance

Funds with Morningstar Analyst Ratings of Gold, Silver and Bronze have been found to outperform their peers, particularly those funds invested in equities

Jeffrey Ptak 13 December, 2017 | 12:50AM Christopher J. Traulsen, CFA

Morningstar Ratings and Performance

Morningstar analyst ratings are an accurate predictor of funds' future returns, a study has found. Tracking fund performance from 2011 to 2017, it found that ratings predictive power varies between asset classes, but is strongest in equities.

The excellent performance of Gold-rated funds paired with the stark underperformance of Negative-rated funds highlights analysts' ability to differentiate the best and worst equity funds within categories. The dichotomy further strengthens over time.

Multi-asset funds with a Gold, Silver, or Bronze Rating significantly outperformed their peers after fees. Bond funds data found the Silver, Bronze, and Neutral-rated compared well, but Gold-rated funds less so.

Among equity funds, Gold-rated funds strongly outperformed while Negative-rated funds heavily underperformed, and the differential grows over time. We further observed that only the Gold-rated funds have consistently beaten their category index.

Although the ratings have yet to experience a full market cycle, these results showcase that the Analyst Ratings have thus far succeeded in sorting funds' future risk-adjusted returns.

How Morningstar Analyst Ratings Work

Morningstar has conducted qualitative, analyst-driven research on funds since 1986. Morningstar's qualitative fund analysis has sought to help users make better investment decisions.

This forward-looking analysis culminates in the Morningstar Analyst Rating, which analysts have assigned to more than 4,500 funds globally on a five-tier scale: Gold, Silver, Bronze, Neutral and Negative.

The Analyst Rating is based on the analyst’s conviction in the fund’s ability to outperform its peer group anf relevant benchmark on a risk-adjusted basis over the long term.

If a fund receives a medalist rating of Gold, Silver, or Bronze, it means Morningstar analysts have high conviction in the fund's ability to outperform a relevant category average or index over a full market cycle, while Neutral and Negative ratings denote lower conviction. 

The Analyst Rating is not a market call; it is meant to augment investors’ and advisers’ own work on funds. Indeed, the Analyst Rating accentuates the importance of factors like expenses and manager ownership of fund shares that can get short-shrift under commonly employed techniques for choosing funds, such as past performance.

Morningstar's global team of more than 100 analysts evaluates funds based on five key pillars — Process, Performance, People, Parent, and Price. These five pillars form the spine of our research approach, and we evaluate each of them when assessing a fund.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Jeffrey Ptak  Head of Manager Research

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