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Making sense of Morningstar stars
Old 05-15-2013, 10:17 AM   #1
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Making sense of Morningstar stars

I understand the concept of assigning star ratings for non-index mutual funds. But sometimes I will compare two funds with the same objective - Fund A has outperformed Fund B for both the 1 year and 5 year periods, but Fund B may have more stars. I've never understood this. Maybe there are other factors that go into the stars - like size of fund, risk/reward, etc. How much importance do you put in the Morningstar ratings when buying and selling mutual funds? For me, it is a factor, but not sure I want to make an investment decision based on the number of stars.
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Old 05-15-2013, 11:06 AM   #2
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Start ratings indicate past performance only, typically for three years. I'm pretty sure they are risk adjusted, and probably relative to their own market sector.

Pay more attention to their Gold, Silver, Bronze ratings. Those take into account factors that Morningstar believes will make a difference to future performance.

If you don't want to get into this deeper than you have, go with a low expense index fund. Even Morningstar's favorites are no guarantee to beat a comparable index fund.

For active funds I look for a fund company with a team approach (not dependent on a single manager), and has several top performing funds in different categories (not a lucky one hit wonder). The individual fund should have a total return that beat its closest index fund by a significant amount over the longest period for which data is available, with some consistency (not just one big spike out of 10 years of below average performance). Low turnover and below average expenses are usually better. If nothing looks particularly appealing, then I go with the index fund (mutual fund or ETF).
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Old 05-15-2013, 01:09 PM   #3
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Check for fund manager continuity and the presence or absence of positive fund flows.
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Old 05-15-2013, 01:44 PM   #4
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Ignore..

Ignore them and index.
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Old 05-15-2013, 03:52 PM   #5
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I threw away a bunch of money years ago buying non-index funds with lots of stars. Now I am of the opinion that since stars are based on past performance, and "past performance is no indication of future results," they are just part of the "noise" of the financial industry and I stick with indexing.

Just my opinion. As they say, everybody has one...
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Old 05-15-2013, 06:59 PM   #6
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My favorite is the Morningstar grillers, ketchup, relish, avocado.
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Old 05-16-2013, 12:27 AM   #7
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Quote:
Originally Posted by GalaxyBoy View Post
I threw away a bunch of money years ago buying non-index funds with lots of stars. Now I am of the opinion that since stars are based on past performance, and "past performance is no indication of future results," they are just part of the "noise" of the financial industry and I stick with indexing.

Just my opinion. As they say, everybody has one...
I always assumed the stars assigned to a fund was correlated to the size of the party thrown by the fund. If they fly everyone business class to bangkok (spouses not invited) for a week, for sure that has to be 5 stars.
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Old 05-16-2013, 07:01 AM   #8
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I tend to look at Lipper Leader ratings more than Morningstar stars. Different funds may be better/worse in different situations, reflected by the five metrics that Lipper rates.
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