Research Library
The Morningstar Analyst Rating for Funds: Analyzing the Performance of the Analyst Rating Globally
By Jeffrey Ptak, James Li | 11 December 2017
We analyzed the global performance of the Morningstar Analyst Rating for funds based on its ability to predict funds' future risk-adjusted returns. We employed two standard approaches to measure the ratings' predictive ability: 1) Fama-MacBeth regressions, and 2) the event study framework. The time frame of ratings is November 2011 through April 2017, and subsequent performance is tracked through October 2017. Our analysis shows that the Analyst Rating exhibited predictive power during our sample period, though the strength varied between asset class. Using the regression technique, we found the Analyst Rating was most predictive among equity and allocation funds, where Gold-, Silver-, and Bronze-rated funds significantly outperformed after accounting for expenses and common risk-factor exposures. Our findings were similar under the event-study method: The average Gold-rated fund produced 0.76% per year in alpha (versus a relevant category index) over a 60-month event horizon whereas the average Neutral- and Negative-rated fund earned negative 0.04% and 0.22% of alpha per year, respectively. Taken as a whole, we find that the Analyst Ratings effectively sorted funds based on their average future risk-adjusted returns.
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