Morningstar’s ratings for mutual funds is being called into question after The Wall Street Journal took issue with its star-system. The system, which awards one to five stars, is based on the funds' risk-adjusted performance relative to peers.
The problem, according to the Journal, is that investors assume erroneously that “the number of stars awarded to a mutual fund is a good guide to its future performance.” Stephen Wendel, Morningstar’s head of behavioral science, agrees that “Morningstar’s star ratings for funds are clearly used in the industry to imply that funds that performed well in the past will do so in the future.”
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