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WSJ Takes Aim at Morningstar; Twitter Storm Erupts

4 minute read


Call it a fight. Call it a battle. Whatever you want to call it, in the world of mutual funds, a proverbial shot was fired on October 25th when the Wall Street Journal took Morningstar, Inc. to task over its fund “star” ratings. By now, we assume most advisors have read the critical piece titled “The Morningstar Mirage.” Executives from Morningstar responded with their own rebuttals; mostly acknowledging the limitations of analysis based on past performance but also defending their methodology based on the WSJ’s own analysis which actually showed that the “star” ratings did in fact tilt the odds in the investors’ favor. Which Morningstar states is the primary objective. Even Twitter got in on the debate sparking something of a mutual fund fire storm…well, really more like a sparkler, but whatever. 

In the article, the WSJ makes a number of claims:

  • Investors rely heavily on star ratings for making allocation decisions
  • Star ratings have no predictive value, despite Morningstar’s claims
  • Five-star fund’s performance rarely remained five-star over the next five years (only 12% did)
  • Star ratings greatly influence asset flows with five-star funds attracting outsized inflows
  • Large investment firms (think Fidelity, BlackRock and Vanguard) appear to have influence with Morningstar’s analysts


While the team at R Squared has some strong opinions regarding this debate, we are more interested in what RIAs think.

A follow-up story from Bob Heubscher on Advisor Perspectives (on behalf of IMCA) titled
“Morningstar Versus The Wall Street Journal: Who Won?” provided a good starting place to help understand the perspective of financial advisors. He believes the core issue to be discussed is whether Morningstar’s star ratings are a reliable guide for investors. As part of his group’s own research, they conversed with 30 large RIAs and found that “star ratings are rarely relied on as a key determinant in selecting actively managed U.S. equity funds.” Josh Brown also posted a piece worth reading on his popular blog, “The Reformed Broker.” He takes aim at the professional advisors who should know better than rely on past performance (i.e. “star” ratings) for future returns and who don’t understand the concept of mean reversion.

Below, we’ve included links to the original WSJ article as well as the follow-up stories from Bob Heubscher and Josh Brown.

While all this makes for good entertainment, the real value to be gained is a better understanding of the role that Morningstar and its “star” ratings play within the due diligence process of RIAs and other investors.

We would love to hear from you.  Please reach out to us or comment below.
Let us know what you think and how/if Morningstar aids in your due diligence. 

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As international equity investors, the team at R Squared Capital Management (former team at Julius Baer / Artio Global) utilizes fundamental and macro analysis in our quest to correctly identify structural tailwinds and headwinds at the geographic, sector and company levels.   

Richard Pell R Squared Capital ManagementFROM THE DESK OF RICHARD PELL

Richard Pell is CEO and Portfolio Manager at R Squared Capital Management.

Richard co-founded R Squared Capital Management in May of 2013. Prior to that, he was Chief Executive Officer and Chief Investment Officer of Artio Global Management LLC, a position he held since 1995 when the firm was part of the Julius Baer Group. Richard also served on the Board of Directors at Artio.

To read Richard's full bio or other RSQ team members, click here.  

Posted by Richard Pell on Nov 8, 2017 4:31:40 PM

Topics: From the Desk of Richard Pell


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