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New Fund Ratings Could Earn Gold Star

The new ranking system is not the company's first attempt at making predictions about future performance. Since 1999, Morningstar has been compiling a list of about 170 funds that are designated as analyst picks.

The picks have generally performed well. After being selected for the list, most funds went on to outdo their categories during the next five years. Of the U.S. stock funds on the list, 70% surpassed their categories. Bond funds did even better. Among taxable bond funds on the list, 89% succeeded. The picks list will now disappear, replaced by the new ratings.

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The performance of the list is worth considering because it is based on the same criteria that are used for the new forward-looking ratings. If the new ratings perform as well as the analyst picks, then the gold system will prove to be a success.

Early Results

So far many of the new rankings are not surprising. The gold-rated funds include Oakmark International (OAKIX), which has a veteran manager who outdid 95% of his competitors in the past five years. PIMCO Total Return (PTTRX), the flagship fund of bond star Bill Gross, also won a gold rating. But there are some controversial choices. Clipper (CFIMX) won a gold, even though the fund was clobbered during the downturn of 2008 and has trailed 90% of its peers in the last five years. The Morningstar analysts argue that the veteran Clipper managers have an effective strategy for finding value stocks that will produce better results in the future.

When the analysts are not sure about the outlook, they award a neutral rating. In that category is Columbia Value & Restructuring (EVRAX). The fund has a strong record, but the veteran manager is leaving. The Morningstar analysts give negative ratings to funds that seem likely to underperform. Funds with poor ratings tend to have high fees and poor track records.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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