This project has two phases. The first phase analyzes the relationship between fund age and the associated overall Morningstar rating. The ratings for each fund are based upon an aggregation of the 3-year, 5-year, and 10-year risk-adjusted return. The 3-year number receives a 20 percent weighting, the 5-year a 30 percent weighting, and the 10-year a 50 percent weighting. However, if a fund has less than 10 years of returns but more than 5 years, the 5-year number receives a 60 percent weighting and the 3-year number receives a 40 percent weighting. Furthermore, if a fund has less than 5 years but more than 3 years of returns, it receives a 100 percent weighting on its 3-year risk-adjusted return. If the fund scores in the top 10 percent of its investment category it receives a rating of 5 stars; if the fund falls in the next 22.5 percent it receives 4 stars; if it falls in the middle 35 percent it receives 3 stars; if it falls in the next 22.5 percent it receives 2 stars; and funds in the bottom 10 percent receive 1 star.
The second research topic investigates the power of the Morningstar ratings in determining fund flows. The time period will be October 1991 to the end of 1999. The Morningstar data contain information on the net assets of individual funds. Professor Morey will concentrate on funds in the Domestic Equity category. This will be the first study to determine the effects of ratings and ratings changes on fund flows. Professor Morey also wants to explore the question of the impact of large flows on subsequent fund returns.
