Morningstar defends star ratings
Morningstar has put the internal turmoil over the dismissal of its chief executive behind it and hit back strongly at a report which questioned the value of the research house’s model for rating managed funds.
The report, released by Frank Russell Company managing director Alan Schoenheimer at last month’s Financial Planning Association (FPA) conference, concluded that Morningstar’s star rating system was not a reliable indicator of future short-term performance.
The report found that $1000 invested in an average five star rated Morningstar fund between June 1998 and June 2000 would have produced $1460 at the end of the two year period. But $1000 invested in a four star fund would have produced $1588, despite the funds’ lower rating.
But Morningstar says its star ratings were never intended to predict the future performance of funds, and questioned Frank Russell’s own research record.
“Schoenheimer’s basic premise is that the mark of a good rating is its ability to predict near-term future performance. No one knows the future,” Morningstar says.
“We need only look at Frank Russell’s…research effort - one output of which is the ANZ Gateway funds.”
The multi-manager ANZ Gateway funds are offered by ANZ through an alliance with Frank Russell, who researches and reviews the managers who make up the funds. Of the nine ANZ Gateway funds rated by Morningstar, none have provided better than average rolling quarterly returns compared to their peers over their two and a half year lives, Morningstar says.
Morningstar says similar attempts were made to discredit its star ratings system when it was first introduced in the US 15 years ago, but that the system had now been widely accepted.
Morningstar confirmed last week that it would not push ahead with legal action against Frank Russell over the report, despite threats of litigation by former Morningstar chief executive Graham Rich.
Rich, who was dismissed by the Morningstar board last month, had described the Frank Russell report as defamatory and damaging to the Morningstar star ratings model.
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