Morningstar - Q3 2022 - 9

EXHIBIT 1
EXHIBIT 2
Star Rating Average Annual Excess
Return vs. Category Average
QQQQQ
QQQQ
QQQQQ
QQQQ
QQQQQ
QQQQ
QQQ
QQ
QQQ
QQ
QQQ
QQ
Average
Q QQExcess Return
Excess Return
2%
1
-2
-1
-3
1 Year 1 Year
1 Year 3 Year 3 Year
3 Year 5 Year 5 Year
5 Year 10 Year10 Year
10 Year
Source: Morningstar Direct. Data as of 02/28/2022.
2%
1
-2
-1
2%
1
-2
-1
-3-3
1 Year 1 Year
1 Year 3 Year 3 Year
3 Year 5 Year 5 Year
10 Year
Source: Morningstar Direct. Data as of 02/28/2022.
Average Annual Excess Return vs.
Category Index
AverageAverage QQQQQ
Excess Return QQQQ
QQQQQ
QQQQ
QQQQQ
QQQQ
QQQ
QQ
QQQ
QQ
QQQ
QQ
Average
Q QQExcess Return
AverageAverage
Excess Return
1%
-1
-3
-2
-4
5 Year 10 Year10 Year
Excess Return
1%
1%
-1 -1
40
-3
-2
-3
-2
-4-4
1 Year 1 Year
1 Year 3 Year 3 Year
3 Year 5 Year 5 Year
Source: Morningstar Direct. Data as of 02/28/2022.
10 Year
20
5 Year 10 Year10 Year
4040
20
20
EXHIBIT 3
Success Rates vs.
Category Average
QQQQQ
QQQQ
QQQQQ
QQQQ
QQQQQ
QQQQ
QQQ
QQ
QQQ
QQ
QQQ
QQ
Q QQ
Percentage of Funds
Exceeding Category
Average Return
Percentage of Funds
Exceeding Category
Average Return
Percentage of Funds
Exceeding Category
Average Return
80
8080
60
6060
average-we calculated success rates for each
cohort ( EXHIBIT 3 ).
Higher-rated funds were 2 to 3 times more likely
to succeed than lower-rated funds. Lower-rated
funds died in droves.
Finally, to assess the rating's success at sorting
funds based on their future risk-adjusted
performance, we compared their starting and
ending star ratings. Since the star rating is based
on funds' risk-adjusted performance, it stood
to reason that this comparison would yield a sense
of whether the ratings were just as successful
at sorting funds when risk is considered.
We found that funds that had 5-star ratings
as of Feb. 28, 2012, were almost 4 times likelier
to have a 4- or 5-star rating by Feb. 28, 2022,
than funds that started with a 1-star rating. In fact,
nearly 80% of funds that started with a 1-star
rating finished the 10-year period with a 1or
2-star rating or died before reaching the end.
Morningstar Analyst Rating
We also found that the Analyst Ratings have
effectively sorted funds based on future
performance. Higher-rated funds were likelier
to survive and outperform than lower-rated
funds, though this effect was less strong when
measured against the category index.
In evaluating the Analyst Rating, it's worth
keeping in mind that we assign ratings
to funds that Morningstar's analysts cover. Our
research has found that covered funds tend
to be larger by assets, have longer track records,
and boast lower expenses, on average,
compared with funds not under analyst coverage.
They have also been higher performing,
on average.
This is evident when we examined the trailing
average annual excess returns of analyst-rated
funds through Feb. 28, 2022 ( EXHIBIT 4 ).
We found that not only did higher-rated funds
tend to outperform their average peer by
a larger margin than lower-rated funds, but that
even lower-rated funds outperformed. This
partly reflects the fact that covered funds
are cheaper and higher performing, on average,
than funds we don't cover.
We should note that the Negative cohort
contained relatively few funds on March 1, 2019,
March 1, 2017, and March 1, 2012, for the
trailing three-, five-, and 10-year periods,
respectively. When taken together with funds
assigned a Neutral rating, nonmedalists
underperformed medalists over these trailing
periods. Also, as of March 1, 2012, analysts
had assigned ratings to only a small portion of
the coverage universe; the Analyst Ratings
were rolled out gradually from late 2011 through
late 2012.
We can quiet some of the noise in the trailing
average annual excess return data by examining
the performance of the Analyst Ratings
using the event-study procedure. This technique
is less sensitive to starting and end points
than trailing returns, as it takes monthly snapshots
of rated funds, measures their performance
over a subsequent period (12, 36, or 60 months),
and averages those measurements to give
a fuller picture.
Under the event-study approach, it is clearer that
the Analyst Ratings have been effective at sorting
funds (EXHIBIT 5 ). Higher-rated funds notched
higher average excess returns than their
typical peer than lower-rated funds, on average.
Though the magnitude differed, the pattern
held when we measured the performance of rated
morningstar.com/products/magazine
9
http://www.morningstar.com/products/magazine
Morningstar - Q3 2022

Table of Contents for the Digital Edition of Morningstar - Q3 2022
