Morningstar Essay

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4. Do you think Morningstar ratings have an impact on what investors do? Do you think they should have? (1) We think the answer is YES. Indeed, just as the three criticism mentioned in the case, there are evaluation weakness in Morningstar ratings, especially the rating is entirely relied on the past performance. And the rating also ignored some crucial factors that would influence investors’ payoff. For example, A fund with at least three years of performance history could be awarded a very high star rating, simply because its stock-picking has been lucky. However, such a highly rated fund may also have high fees, front- and back-end loads, 12b-1 fees, high turnover, and hidden costs that are more likely to undermine its future performance. But there are still many investors influenced by the rating system in the investment decision. There are two reasons for this: • Most individual investors don’t understand the evaluation method and other potential problems with the star ratings. Many investors appear simply to be mesmerized by the stars, and they just follow them without further considerations. Therefore, many investors misuse Morningstar Fund ratings as a tool to predict future returns. • Different investors have different views about which screening metrics an investor should use to reduce the number of mutual funds down to a more manageable set for evaluation in detail. Even the criticism about the rating, it offered value to investors for reference. For example, an evaluation system, which takes in to account the future perspective, can’t promise the return and its forecast precision, just like the analyst report. Hence, there are still some investors see Morningstar ratings as one of the resource to find winning mutual funds (2) Based on the case, we noticed that Morningstar ratings are indicators of past performance, and should not be used

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