I used to own Primecap Odyssey Growth, POGRX, influenced a bit by Morningstar's Gold rating. If you look at past performance for about 4 years, POGRX should get a Moldy Tuna Sandwich rating ( I came up with that rating). Compared to the index and similar funds, POGRX has done very poorly for a long time. What is the Morningstar analyst thinking to give this fund a gold rating? Do you have overall confidence in Morningstar forward looking Gold, Silver, Bronze ratings for mutual funds?
“Do you have overall confidence in Morningstar forward looking Gold, Silver, Bronze ratings for mutual funds?”
None whatsoever. These are subjective and based on who knows what (or who knows whom).
M* Star ratings [5*, 4*, etc] are different from Analyst ratings [Gold, Silver, etc].
1*, 2* are bottom of the performance barrel, so be careful with them.
When analyzing purchases I do not pay much attention gold, silver,, bronze or neutral ratings. I look at the star rating and then look at the ten year results. Generally those with good past performances correlate with the star system. I too have questioned in my own mind how can a fund have a gold rating and 1 or 2 Stars. If the fund has a good investment strategy but poor results, maybe they are not following it. A bad year or two is understandable, but 10 year poor performance and still gold does not make much sense.
I consider M ratings but do not blindly accept them. Even such a long time stellar fund as prnhx was promoted to gold briefly as late as 2019.
Primecap VPMCX is in the same boat, not sinking but took on a ton of water (-19.20 vs the index YTD). That will be hard to recover from, since it (never?)beats the index by anything close to that.
Barron's have done a piece on Morningstar's ratings system. Criteria were changed last year to take account of fees leading to downgrades for managed funds. The star system is based on past performance and seeks Alpha. The medal system looks to the future taking into account the parent company and management etc. You can compare Morningstar's ratings with CFRA's. There are differences in their respective ratings. Art or science?
CFRA has a fair value rating, which is important, but as with all so-called fair value measurements, they tend to justify current prices and trends more than book or intrinsic value. The bottom line is rating agencies have the resources to analyze companies and funds. The average investor doesn't. So you take the rough with the smooth. Chances are higher that Morningstar gets its right than wrong.
During the credit crisis rating agencies got a lot of flack for problems relating to 'agency'. This gives rise to a conflict of interest as rating companies are paid by the companies they rate. This was confined more to credit rating agencies.
I expect Morningstar has meetings with major companies before major downgrades to gain a better understanding into performance issues or accounting anomalies. This will be a fiduciary responsibility. This may also provide companies with the opportunity to seek advice on measures to improve their ratings.
Past performance isn't a predictor of future performance, but more importantly it is lagging data and open to manipulation. Profit is an opinion. Rumors and the grapevine provide very useful intelligence, but all this is not relevant to the vast majority of retail investors who buy the market to diversify away specific risk. IMVHO.
If the fund has a good investment strategy but poor results, maybe they are not following it. A bad year or two is understandable, but 10 year poor performance and still gold does not make much sense.
Sometimes a bad year or two will lead to poor 10 year performance.