Performance-based ratings like the Morningstar star system have a lousy track record predicting future investing success, according to guest writer Gordon Tewell in P & I
Unfortunately, Tewell writes, these rating systems tend to be imperfect when it comes to predicting future performance. The basis of most rating systems is some combination of past performance — typically over three-, five- or 10-years — and a measure of the fund's risk. The problem with using purely quantitative rating systems is that the information used for each manager is historical.
Moreover, according to Tewell, these ratings often fail over market cycles and top-quartile mutual funds often lag benchmarks.
To read more of Tewell's critique of the philosophy of past performance, turn to P&I
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