The
Dangers of Being "Starstruck" by
Morningstar's Ratings
Morningstar is one of the most
trusted names in the business of rating mutual funds, and with good
reason: Its
peerless service provides accurate, thorough and timely information. As
part of
its service, Morningstar awards performance "stars" to mutual funds.
Though the star ratings are popular, we feel that the financial
advisers owe it
to their clients to fully understand the star system methodology and
its
limitations.
"We've
consistently conceded the limitations of our star ratings. The star
rating is
not a conclusion; it's a starting point."
--Don Phillips, President, Morningstar*
Many
investors use Morningstar's "stars" as the main, and sometimes only,
criteria for choosing a mutual fund. Money magazine* offered
proof, and
explained the danger of such a strategy: "Last year, according to
financial Research Corp. of Chicago, 87% of all new money going into
U.S. Stock
funds--some $97 billion-- went into funds rated four of five stars by
Morningstar
"That
statistic suggests that to many
investors--not to
mention brokers and financial planners--are using Morningstar as the
ultimate
shortcut: They count the stars and buy the fund."
Following
star ratings encourages investors to buy at the top, and we all know
that what
goes up, must come down: "The average five-star fund sustains that
rating
for only six months," according to Money.
We help
our clients resist the temptation to shoot for the stars by emphasizing
the
long-term aspect of a fund or institution money manager: the strength
of the
investment adviser, its expense ratio and its results during difficult
markets.
*Money,
"Don't wish upon the stars to pick funds," July 1996.
or
520.884.7550
jpw@financial-architects.com
3971 E. Paradise Falls, Suite 114