Welcome to the new my.morningstar.com! Learn more about the changes and how our new features help your investing success.

The Fund Winner Curse Is an Optical Illusion

Just because winners decline doesn’t make them a bad choice

Good Is Bad 
A month ago, The Wall Street Journal ran a story called "Mutual Funds' Five-Star Curse." Morningstar featured (indirectly) in the headline, but the true subject was not the behavior of the star ratings. Rather, it was the inevitable disappointment that came from investing in the top-performing mutual funds. Whether measured by the Morningstar Rating for funds, or any other returns-based system, today's winners do not sustain.

Per the WSJ's report (which used Morningstar data), of funds that had the highest rating of 5 stars on July 2004, "37% had lost one star 10 years later. But 31% lost two stars, 14% dropped three, and 3% lost four [stars] … Only 58, or 14%, of the 403 funds that had five stars in July 2004 carried the same rating through July 2014, Morningstar says."

The reporters, and their editors, believed that this evidence demonstrated the fruitlessness of buying strong past performers. So, I suspect, did almost every reader. Those statistics arrive quickly, and they do look damning. A full 86% of all 5-star funds failed to retain their rating. And most of those fell by more than 1 star. Past performance, we are told, is a poor indicator of future performance. This study offers the evidence.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Member.

Register For Free

About Author

John Rekenthaler, CFA  John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

Audience Confirmation


By clicking "accept" I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See "Cookie Consent" for more detail.

  • Other Morningstar Websites
© Copyright 2021 Morningstar, Inc. All Rights Reserved.      Terms of Useund      Privacy Policy.
© Copyright 2021 Morningstar Asia Ltd. All rights reserved.

Terms of Use        Privacy Policy        Cookies