Mutual Funds and Morningstar Ratings

Can I just look at the number of stars the fund has in Morningstar.

Morningstar is a great company and we used every search alone. They have what is called a mutual fund star ranking system. They have five-star funds with the best and one-star funds with worst.

Now a lot of people simply used Morningstar’s number of stars to decide which mutual funds which are the best and which ones are not. Morningstar has always increasing their research in trying to do a better job.

Back in 2000, 2001, and 2002, they lump all US stocks together. This was the time at which the markets were turning from a growth portfolio that did well in the 1990’s to a value portfolio that did well after 2000.

In Morningstar, all of the aggressive growth, large cap mutual funds have five-stars and all of the value and small cap had one-star. At the very moment at which the five-star funds were going to awful and the one-star funds will be going to do the best because the categories were changing.

Now since then, Morningstar has increased the number of categories tremendously so that they have a category for large cap growth. They have a category for small cap value. So that means the large cap growth funds and small cap value funds are each evaluated in their own categories and the five-star is the best large cap growth fund with returns.

However, their categories are still not big enough so they may have a category called natural resources. Natural resources get diversified between oil and natural gas and precious metals and gold.

Now, that Morningstar has more categories, their rating system is better but even within a category they may not distinguish between two very different investments. They have a category called natural resources that includes oil and natural gas but it also includes precious metals and mining companies and one may do very different than the other.

So, it’s possible to pick the best fund in a category that Morningstar doesn’t define properly and you’re picking a one-star fund simply because it’s lump in with other things that don’t move and sync with it.


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