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Article

From Rising Stars and Falling Angels: On the Relationship Between the Performance and Ratings of German Mutual Funds

Roland Füss, Julia Hille, Philipp Rindler, Jörg Schmidt and Michael Schmidt
The Journal of Wealth Management Summer 2010, 13 (1) 75-90; DOI: https://doi.org/10.3905/JWM.2010.13.1.075
Roland Füss
is a professor of finance at the European Business School in Oestrich-Winkel, Germany.
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  • For correspondence: roland.fuess@ebs.edu
Julia Hille
is an analyst at Credit Suisse Equity Sales in Frankfurt, Germany.
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  • For correspondence: julia.hille@credit-suisse.com
Philipp Rindler
is a research assistant at the European Business School in Oestrich-Winkel, Germany.
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  • For correspondence: philipp.rindler@ebs.edu
Jörg Schmidt
is a portfolio manager at Union Investment Institutional in Frankfurt, Germany.
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  • For correspondence: joerg.schmidt@union-investment.de
Michael Schmidt
is a managing director of Union Investment – Private Funds in Frankfurt, Germany.
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  • For correspondence: michael.schmidt@union-investment.de
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Abstract

The aim of this article is to analyze the relationship between a fund’s Morningstar rating and 1) its subsequent performance and 2) its rating and subsequent inflows or outflows of funds. The authors distinguish between actual and expected predictability as perceived by investors. This study is the first to analyze a prolonged investment period on the German market after Morningstar implemented essential changes in its rating methodology in 2002. The empirical findings suggest that the Morningstar rating has a limited ability to predict future fund quality for the German fund market and that the Sharpe ratio may be a better forecasting tool than the Morningstar rating, although neither is ultimately reliable. Furthermore, the fund flow performance relationship strongly depends on overall market movements. Highly rated funds suffered much greater outflows than lower-rated funds, especially during bear markets. An event study reveals, however, that investors do perceive rating changes as new information. German investors seem to react later than American investors, suggesting they are less influenced by Morningstar ratings in their allocation decisions.

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The Journal of Wealth Management: 13 (1)
The Journal of Wealth Management
Vol. 13, Issue 1
Summer 2010
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From Rising Stars and Falling Angels: On the Relationship Between the Performance and Ratings of German Mutual Funds
Roland Füss, Julia Hille, Philipp Rindler, Jörg Schmidt, Michael Schmidt
The Journal of Wealth Management Apr 2010, 13 (1) 75-90; DOI: 10.3905/JWM.2010.13.1.075

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From Rising Stars and Falling Angels: On the Relationship Between the Performance and Ratings of German Mutual Funds
Roland Füss, Julia Hille, Philipp Rindler, Jörg Schmidt, Michael Schmidt
The Journal of Wealth Management Apr 2010, 13 (1) 75-90; DOI: 10.3905/JWM.2010.13.1.075
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    • MANAGEMENT AND RATINGS
    • DATA AND METHODOLOGY
    • Methodology Used for the Dummy Variable Regressions
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    • CONCLUSION
    • APPENDIX A
    • ENDNOTES
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