Box Jumping: Portfolio Recompositions to Achieve Higher Morningstar Ratings
How money is managed in the stock market is of first-order importance, particularly in the United States, where the plurality of individuals participate in equity markets through delegated portfolio management (i.e., professional portfolio managers). A central player in this process is Morningstar – who provide widely recognized and accepted star ratings for mutual funds. These […]
Lauren H. Cohen is the L. E. Simmons Professor of Business Administration at Harvard Business School, David Sunghyo Kim is a PhD student at MIT Sloan School of Management, and Eric C. So is the Sloan Distinguished Professor of Management at the MIT Sloan School of Management. This post is based on their recent paper.
How money is managed in the stock market is of first-order importance, particularly in the United States, where the plurality of individuals participate in equity markets through delegated portfolio management (i.e., professional portfolio managers). A central player in this process is Morningstar – who provide widely recognized and accepted star ratings for mutual funds. These ratings guide investors on where to allocate their money, with higher-rated funds on average attracting significantly more investor capital. Morningstar’s star ratings are based on a clear and standardized process, which helps investors compare funds easily. However, this transparency also opens the door for mutual fund managers to adjust their strategies to receive higher ratings, boosting their appeal to investors and, in turn, the mutual fund managers’ revenues.
