Top Funds Lose Rating Star
It’s been a tough year for mutual fund stars.
Seven top-performing growth stock mutual funds lost one of their five stars in the first six months of the year, according to Morningstar Inc., which ranks mutual fund performance.
The most dramatic demotion was Fidelity Investment’s Magellan Fund, which dropped to four stars in February after 10 years of uninterrupted five-star ratings.
The other funds were: Alliance Growth B, Brandywine Blue, Crabbe Huson Equity, Fidelity Advisor Growth Opportunities A, Harbor Capital Appreciation and Third Avenue Value.
While a five-star rating isn’t a guarantee of future success, it does help attract investors.
“It’s like Siskel and Ebert giving you two thumbs up,” said Victoria Martinsen, a spokeswoman at Safeco Mutual Funds in Seattle, which has a five-star rated equity fund. “It’s a great marketing tool.”
Some funds, however, aren’t overly concerned when they slip from the best-performing category. Martin Whitman, who manages the Third Avenue Fund “couldn’t care less,” said Joanne Jaffin, director of marketing at the New York-based company. “Five-star funds rarely stay five stars, they typically fluctuate,” she added.
When a restaurant loses a Michelin star it can take years to win back, but a fund can regain its place at the top in as little as a month.
The Third Avenue Fund, for example, slipped to four stars in June and earned its fifth back again in July. Fidelity’s Advisor Growth Fund dropped to four stars in February, after 23 months of five-star rankings, but clawed its way back to five stars in July.
That’s because Chicago-based Morningstar ranks funds every month on a trailing three, five and 10-year basis. Those equity funds that fall in the top 10 percent based on their risk-adjusted performance get five stars.
Ratings can change because of recent poor performance, as in the case of Magellan. The fund is up about 1 percent for the year, compared with about 9 percent for the Standard & Poor’s 500 Index, thanks to a big bet on bonds.