RT Journal Article SR Electronic T1 From Rising Stars and Falling Angels: On the Relationship Between the Performance and Ratings of German Mutual Funds JF The Journal of Wealth Management FD Institutional Investor Journals SP 75 OP 90 DO 10.3905/JWM.2010.13.1.075 VO 13 IS 1 A1 Roland Füss A1 Julia Hille A1 Philipp Rindler A1 Jörg Schmidt A1 Michael Schmidt YR 2010 UL https://pm-research.com/content/13/1/75.abstract AB 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.TOPICS: Mutual funds/passive investing/indexing, developed, information providers/credit ratings, performance measurement