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Selectivity, Market Timing and the Morningstar Star-Rating System

Author

Listed:
  • 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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    Cited by:

    1. Mostafa Shabani & Ali Khodarahmi & Rouzbeh Ghousi & Emran Mohammadi & Hossein Ghanbari, 2025. "An appraisal of fund of funds efficiency based on risk-adjusted performance measures: Application of an augmented WASPAS methodology," PLOS ONE, Public Library of Science, vol. 20(7), pages 1-23, July.
    2. 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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    JEL classification:

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

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