Ratings that help you de-select funds

How to avoid inferior investments with Morningstar Quantitative Ratings

Morningstar 23 May, 2019 | 2:00PM

Traditionally, ratings systems are evaluated from the perspective of choosing the best possible investment for an investor. However, improving investor outcomes can also have much to do with avoiding poorly performing investments.

In many cases, investors are not choosing investments from a practically infinite menu but are already invested in some fund and need to decide whether to switch out of their current selection. If the investor does decide to switch, it may not be clear what constitutes a superior alternative. We take a new look at the Morningstar Quantitative Rating for funds with this perspective in mind.

We will examine the performance of the Morningstar Quantitative Rating based on an event-study approach. The event study displays the performance of a rating by averaging the performance of all ratings of each level. For example, the event-study line for a Negative rating shows the average performance of every Negative rating one, three, six, and 12 months after the rating.

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