Predictability of Morningstar Rating for Future Performance on Canadian Mutual Funds

This paper analyzes the predictability of Morningstar Rating for future performance of Canadian equity mutual fund by applying dummy variable regression analysis on three performance metrics - Sharpe Ratio, Jensen’s Alpha, and Two-index Alpha. The examination period is from May 2004 to April 2009. The results show that Morningstar Rating System can predict future performance of Canadian mutual fund. Specifically, the higher rated funds significantly outperform lower rated funds. Similar results are obtained irrespective of the reference group used for the dummy variable regression.