Performance Persistence of Morningstar Rated Funds
Väinölä, Jiri (2010)
2010
Kuvaus
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Tiivistelmä
Performance persistence in mutual fund research has been a topic of great interest for over fifty years. The studies on the subject try to find out whether past performance can be used to predict future performance in mutual funds. If evidence of persistence in performance is found, active fund selection based on past performance may be of interest to individual investors. On the other hand, if there is no sign of persistence, past information of mutual fund returns would have no value for investors. Several fund rating companies, i.e. Morningstar, rank funds according to their past performance. These rankings are commonly used by investors in decision making.
In this study the focus is on the persistence of Morningstar Risk Adjusted Ratings. A sample of Finnish equity funds is used to investigate whether ratings have predictive value. Persistence will be tested by dividing the research period into subperiods consisting of three-year ranking periods and one- and three year holding periods. The performance in both periods is tested to see whether the performance in the ranking period carries out to the subsequent performance period. Two types of test are used to test for performance persistence: The Spearman rank correlation test and stacked returns test.
The results show that neither test indicates positive persistence in Morningstar ratings. However there is evidence of negative performance persistence in both tests, which indicates of performance reversal. Thus, investors should be careful when interpreting Morningstar ratings. The results are also inconsistent with earlier findings that suggest investors could earn significant excess (risk-adjusted) returns by purchasing best past performing funds.
In this study the focus is on the persistence of Morningstar Risk Adjusted Ratings. A sample of Finnish equity funds is used to investigate whether ratings have predictive value. Persistence will be tested by dividing the research period into subperiods consisting of three-year ranking periods and one- and three year holding periods. The performance in both periods is tested to see whether the performance in the ranking period carries out to the subsequent performance period. Two types of test are used to test for performance persistence: The Spearman rank correlation test and stacked returns test.
The results show that neither test indicates positive persistence in Morningstar ratings. However there is evidence of negative performance persistence in both tests, which indicates of performance reversal. Thus, investors should be careful when interpreting Morningstar ratings. The results are also inconsistent with earlier findings that suggest investors could earn significant excess (risk-adjusted) returns by purchasing best past performing funds.