Morningstar ratings and Norwegian mutual fund performance : an empirical study of the Morningstar rating system as a predictor of performance for mutual funds investing primarily in Norwegian equity

2020

This thesis examines the Morningstar rating system as a predictor of mutual fund

performance for mutual funds investing primarily in Norwegian equity. The predictive

abilities are examined using a data set free of survivorship bias, which contains data

on 136 mutual funds from January 2002 to December 2019. Mutual fund performance

is evaluated using estimates of alpha from three different factor models of performance

measurement: the Capital Asset Pricing Model (CAPM), Fama and French 3-factor model,

and Carhart 4-factor model. To comprehensively test for predictive abilities in the rating

system, both random effects panel data regressions and strategies of buying historically

top-rated ("winners") versus low-rated ("losers") funds are employed. The results indicate

findings that are robust across different performance measures and styles of funds. First,

for the period before the financial crisis, from January 2002 to March 2008, low ratings

from Morningstar generally indicate relatively poor future performance. Second, for the

period during and after the financial crisis, from April 2008 to December 2019, low ratings

from Morningstar, on the contrary, indicate relatively high future performance. Hence, in

the period before the financial crisis, investors could invest in past winners to generate

higher returns than an investment in past losers would have yielded. Contrary, during and

after the financial crisis, the loser strategies outperformed the winner strategies. Third,

there is little statistical evidence that Morningstar’s highest-rated funds outperform the

next-to-highest, median, and next-to-lowest rated funds in both periods.