Their methodology for assigning star ratings is entirely based on average returns it can't account for when a really good manager has one bad year that throws off the trailing averages. However, we part ways when they start to make subjective calls as to the merits of one fund vs. Since we already know, and Morningstar admits, that the fund rating is virtually useless, should the fund industry be allowed to use them in their advertising?Д«old: I think Morningstar does a terrific job of compiling hard statistical data on mutual funds. Yet, the Morningstar stars are probably the most heavily advertised ranking the fund industry uses (and I believe Morningstar takes in some kind of fee for allowing fund companies to use them in their advertising). Wiener: Once a year or so Morningstar does its mea culpa ( see link) and basically says its star ratings are not really the be all, end all way to rank, or even research and choose funds. Richard Gates, portfolio manager for TFS Capital. Wiener, editor of Independent Adviser for Vanguard Investors and CEO of Adviser Investments ДЄdam Bold, founder and chief investment officer of the Mutual Fund Store 'Our Fund Analyst Picks do an even better job of that than the star rating, and because there are fewer picks than five-star funds, it also narrows the list to fewer choices.'Дaniel P. 'The star rating isn't a complete solution, but rather an aid that helps you to narrow the field and improve your chances for success,' the company said.

Morningstar says it's a matter of user demand-since those are the largest fund families, it's not surprising that they generate the most interest. The panel also wondered why Morningstar only produces fund family reports for Fidelity, American Funds and Vanguard. The fee we charge is based on the number of funds managed by a fund company, regardless of how the funds are rated.' We do charge firms for any other type of use of the star rating, such as direct shareholder communication like a direct mail or e-mail campaign. 'We do not charge a fee for firms to use the star rating in advertisements. In an e-mail, a Morningstar spokesperson replied. The fee is charged based on the number of funds in the family, but our panelists were able to produce one Morningstar licensing agreement that pegged the price for one fund at about $8,000 a year. Morningstar charges funds to use its star ratings, and other proprietary data and research in investor letters. While its analysts are good, our panel noted that Morningstar does have some conflicts of interest because the company provides services to the mutual fund industry.

They say the star ratings are not only not a good indicator of how funds will perform in the future, they're not even a good starting point for research. Our panel of mutual fund experts isn't all that impressed. They examine portfolios, meet with fund managers divine industry and market trends and do the old 'kick the tires' routine that all 'bottoms-up' analysts are supposed to excel at. Morningstar's analysts take a more subjective approach to fund analysis. Stars are assigned based on below-average, average or above-average return over a five-year period. First, it uses its quantitative star rating system, which weighs the fund's returns compared with its peers. , a firm that analyzes stocks and funds in two ways.

No doubt many of these fund buyers are choosing their investments with advice from 21st, reversing a trend of redemptions, according to the Investment Company Institute. The industry saw $4 billion in new money during the week of Jan. Meanwhile, investors are buying mutual funds again.

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