The Determinants and Predictive Ability of Mutual Fund Ratings

Abstract

This article examines the determinants and predictive ability of theMorningstar mutual fund rating system. The authors find that higherratings tend to have higher risk-adjusted returns, lower systematicrisk, a higher degree of diversification, a large asset base, longermanagerial tenure, and lower front-load charges and expense ratios.Furthermore, fund ratings tend to exhibit significant persistenceover a short-term time horizon, and highly rated funds tend to performbetter than other funds during the time period of the study.