Morningstar's fund analysis is one of those products that everyone uses — even if it's not always entirely clear how they come up with it.

Today, the publication clarified one aspect of it's operations – writing a piece about how it uses information from funds no longer in existence.

Writer and assistant site editor Adam Zoll starts by defining "survivorship bias" saying it "refers to how historical fund performance data can be skewed if you consider only existing funds rather than also including funds that have been liquidated or merged into other funds."

He notes that Morningstar's rankings are subject to survivorship bias, but that, in the end, it is not that big of a deal:

But despite being subject to survivorship bias, fund trailing-return rankings and Morningstar Risk ratings are still a useful tool investors can use to compare a fund's performance to that of its surviving peers over time. After all, for investors trying to decide whether to buy, sell, or hold a fund, how that fund ranks relative to its current competition--rather than its performance relative to funds that no longer exist and are no longer available--is usually what matters most.

For more information, check out the original article.  

Edited by: Ben Geier


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