Do Those Five-Star Funds Really Shine?

Thanks in part to the popularity of its one-to-five-star mutual-fund ratings, Morningstar (MORN) went public on May 2 in a deal valuing the company at more than $700 million. Now, new research is questioning the value of those ratings.

Finance professor Matthew Morey at Pace University reviewed the performance of diversified U.S. equity funds in the three years before and after they first received the coveted five stars. Once the funds are adjusted for risk, they outperformed the Standard & Poor's 500 (MHP)-stock index on average by 0.36% a month in the three years before they earned top honors and trailed by 0.41% a month afterward.