Morningstar Migration

Chart of the Week for October 26-November 2, 2001

Many investors put great weight on Morningstar’s star ranking despite the company disclaiming its use as a predictive tool: “Investors should keep in mind that while it serves as an initial screen, the rating is only the first step toward a more comprehensive evaluation.” Market segments that have performed well end up with the highest number of 5 star funds mainly due to being in the right place at the right time rather than as a byproduct of the fund manager򳠳kill. For example, at the market’s peak in March 2000, 82% of Large Growth Funds were rated as either a 4- or a 5-star fund; this percentage was down to 10% by September 2001. Conversely, as of March 2000, only 4% of Small Value Funds posted 4 or 5 stars; this percentage soared to 68% by September 2001. This change of fortune is coincident with the change in leadership of these market segments, not the fund managers’ skill level. So, just because a fund has only two stars doesn’t necessarily mean it is a “bad” fund; it may simply mean that the style to which it adheres is out of favor.

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