Morningstar Inc., the Chicago-based publisher of mutual fund ratings that investors use to decide which investments to make, doesn’t reliably pick winning funds, according to an investigative report by The Wall Street Journal.
Morningstar gives funds one to five stars for past performance, with five the best. Many investors treat the stars as a guide to future performance, but over time, the performance of funds with different initial star ratings converges, the newspaper found.
Nearly every asset manager in the world pays Morningstar for the data collected by the company. About 250,000 financial advisers rely on the Morningstar’s data, services or ratings, making its analysis hugely influential among retirement plans and brokerages.
Morningstar groups funds among more than 100 categories based on their investing style or area. It then compares funds to other ones with the same investment focus – not to the overall market. The top 10 percent of funds in each group receive five stars, the bottom 10 percent get one, and the rest get two, three or four stars, the WSJ reported.
Those five-star ratings turned out to be meaningless predictors of future performance. For all of the measured periods—three, five and 10 years—five-star domestic equity funds were more likely to turn in a one-star performance than a top one, the WSJ said.
“That means a five-star rating for the equity funds was no more an omen of success than it was one of failure,” according to the newspaper.
Morningstar said it never claimed its star ratings predicted future performance. The star system is backward-looking, evaluating past performance. “We have always been very clear that it’s not intended to predict future performance,” the company said in a written statement cited by the WSJ.
Meanwhile, BlackRock Chairman and CEO Larry Fink says investors should expect just 4 percent returns over the next 10 years with a balanced portfolio of stocks and bonds over 10 years.
"There are going to be some times where you're going to have a market setback," Fink told CNBC.
"We're talking about a balanced portfolio. We're talking about over a 10-year horizon," Fink said.
"Obviously, this year we are making far better because of the equity market return," he added, but warned some years could be much worse.
"There are going to be some times where you're going to have a market setback where you could lose 20, 30, to 40 percent of the market."
Fink also said the global economy is starting to flourish.
"We're in our eighth year from the Great Recession," he said. "We're seeing Japan and China accelerating. Japan may grow 2½ percent over the next quarter."
BlackRock is the world's biggest money manager with nearly $6 trillion in assets under management, CNBC said.
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