I am writing in response to questions I routinely receive form clients regarding the Morning Star Rating system of Funds.  I want to discuss Morningstar 5 Star Rating System.  Please consider the following:

  1. Equity Index Funds by nature will never receive a Five Star rating because the Star Rating System is looking at past performance and then rewarding those funds that had the very BEST past performance.  As you know, an Index Fund contains a very wide diversity of equity positions.  Our fund, for example, has over 16,000 unique equity positions.  Of course, in any given year, some of those unique equity positions will do better than others.  So, if you are comparing a very diversified fund with a fund that is focused on just one or a few sectors, the fund focused on just one or a few sectors will outperform the well-diversified funds in some years.  The Morningstar Rating System will give that fund a higher star rating.  The difficulty, however, lies in knowing BEFOREHAND which of those funds focused on one or a few sectors will outperform the index and which of those funds will not.
  2. A 3 to 4 Morning Star Rating is given to those funds whose PAST performance is in the top 20%.  This is where you would expect index funds to be found given their structure.  An Index fund will not be in the top 1-2% and therefore will not receive a 5 Star Rating.
  3. Regarding the Bond Fund One Star Rating:  Please note that our Bond Fund is a short term bond fund that is used to mitigate portfolio volatility.  Our bond fund has not been constructed for return.  The Morningstar bond rating Star System is comparing our bond fund with its unique design and construction with all bond funds–including bonds funds with longer bond maturity dates.  Bond Funds with longer bond maturity dates will certainly have better returns; however, this will also greatly increase the bond portfolio’s volatility/risk.  The use of those longer bond maturity dates would undermine our goal of using bonds to MITIGATE/damper the risk in a portfolio and not for return.

If you would like to discuss this personally, simply contact us online or call me at (614) 472-4510.