Do Morningstar Ratings Matter?
A common misconception amongst doctor investors is that their portfolio should only be composed of 4 and 5 star funds. In reality, these ratings are based only upon past performance and have no bearing on future returns. Consider the following investment advice for doctors:
This graphic shows that actively managed funds that achieve top performance in one period typically do not repeat their success in a subsequent period.
The stacked graph at left sorts the Five-Star funds by cumulative 10-year performance relative to each fund’s benchmark (includes only those funds with a complete return history for the period). As shown, the five-star category comprises 403 funds. The right box shows how these five-star funds performed relative to their benchmarks in the subsequent 10-year period. The arrows indicate the movement of these top funds across categories.
Only 11% of the five-star funds repeated their top performance in the subsequent 10-year period. 68% of the funds dropped to the four, three, two and one-star categories. More significantly, 21% of the original five-star funds did not survive the entire subsequent period. These top managers, who were perceived as the most skilled in the US equity market, showed no ability as a group to repeat their top-quartile performance. Indeed, 21% did not survive, and the funds that did survive were spread across the sorted universe.
The lesson of this illustration: choosing actively managed equity funds according to past success does not guarantee an equally successful investment outcome in the future.
Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.
The information provided is for informational purposes only and should not be construed as a recommendation or advice. Further, this is not an offer to buy or sell securities or other products and services of Larson Financial Group or its affiliates. Please consult an appropriate investment professional regarding your specific needs.