Morningstar backs off threat to Russell

Morningstar has backed off threats to sue fellow researcher Frank Russell over its analysis of star ratings.

After the article was picked up and published by the Australian media former Morningstar ceo and publisher Graham Rich threatened to sue Frank Russell for defamation.

In a statement issued to Frank Russell yesterday, Morningstar's US-based parent company confirmed that it would not push ahead with any suit filed or intended to be filed against Frank Russell by Rich.

Rich had alleged the Frank Russell report, which used data from Morningstar, was defamatory and had caused the Morningstar star ratings model to suffer reputational damage.

The Russell report concluded that star rating systems are not a reliable indicator of future short-term performance.

"The star rating of a fund appears to have a slight correlation with its past performance, no clear correlation with its future performance, and should not be the sole basis for investment decision-making," he says.

The report found that $1000 invested in an average five star rated Morningstar fund between June 1998 and June 2000 would have produced $1460 at the end of the two year period. But $1000 invested in a three and four star fund would have produced $1481 and $1588 respectively, despite the funds' lower rating.

Schoenheimer says investors and advisers have to be alert to the limitations of star ratings systems.

"The consequences of relying solely on star ratings for making a decision on a future investment are just too great. If you buy a five star ranked fund today, don't bet on it delivering you a five star return in a year's time."