Rating the ratings : A Critical Analysis of Fund Rating Systems
Authors : Noël Amenc Professor of Finance and Director of the EDHEC Risk & Asset Management Research Centre
Véronique Le Sourd Research Engineer for the EDHEC Risk & Asset Management Research Centre
Fund ratings play a significant role in fund selection for investors: the funds being made available are more and more numerous and increasingly diversified in terms of assets and style management.
Ratings are in fact a simple tool with which to evaluate and compare the respective qualities of funds with regard to their risk and return. Moreover, numerous studies performed in the United States have shown that investors are widely influenced by fund ratings in making their choice, whether it is for an initial subscription or with a view to readjusting their investment in the event of rating upgrades or downgrades. Meanwhile, the various ratings do not offer the same properties in terms of performance evaluation and risks taken into account. This article provides a comparative analysis of a selection of leading rating systems that are very familiar to investors, including Standard & Poor's star rating, the Morningstar rating, and the Lipper Leader rating, and also addresses the required properties for an optimal rating system. This critical analysis was carried out in 2004 to allow for the development of a new European rating system, the Europerformance-EDHEC style ratings, which are not evaluated here..
Created on October 26, 2007
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