The 1999 grant produced a paper that studied the methodology and the impact of the Morningstar mutual fund rating system.
The paper investigated the effectiveness of the Morningstar rating system in predicting future fund performance. Further examined is the influence of the ratings on the mutual fund industry. The researchers found that there was little difference in the future returns of funds awarded four or five stars. However, the authors concluded that the lowest ratings were effective in predicting future low-performing funds. The authors compared Morningstar’s ratings results with those obtained using an alternative analytical approach for mutual funds, the "na‹ve" predictor, where a basic study of historical average monthly returns over 10 years was performed. It was found that the alternative predictive method, when using the same amount of information used by Morningstar, was as effective, and perhaps slightly more effective in predicting future performance-winning funds. The researchers also found evidence that funds with the largest inflows of money tended to be "five-star" funds and that there was heavy usage of the Morningstar ratings in fund company’s advertisements.
An article based on the research paper, "The Morningstar Mutual Fund Star Ratings: What Investors Should Know", was published in Research Dialogue, Issue number 64, (July 2000). The paper, "Morningstar Mutual Fund Ratings: The Age of Funds and the Power of Ratings", was published in the Journal of Financial and Quantitative Analysis, Vol. 35, No. 3, September 2000
