NEW YORK (TheStreet) -- For decades, Morningstar's ratings have been a powerful force in the mutual fund industry. Funds that win a top five-star rating tend to attract assets, while most funds that receive a lowly one star soon go out of business.Fund companies with high grades are quick to mention them in advertisements. But academic studies have shown that the ratings don't necessarily provide reliable guidance. All too often, funds that won top grades have gone on to deliver mediocre results. Now, Morningstar has developed a new ranking system that will rate recommended funds as gold, silver or bronze. Should you ignore the new system? Not necessarily. There are good reasons to think that the latest approach could be a helpful predictor of future performance.
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. 'Better Names to Own' Than JPMorgan: FBR >> 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.