Fund Rating Systems and Performance Predictability

This paper studies the performance predictability of external fund rating systems. Most investors use 5 stars rated funds to build their portfolios. The underlying idea is that funds which were the best during the last three years will be better performers than the other funds in the future. It implies that the 5 stars rating is a good persistence measure of the performance. Using a Markov modelling and the seminal empirical work of Garnier and Pujol (2007), we show that ratings persistence is poor. It means that fund selection or a fund picking process may not be reduced to choose funds in a 5 stars rated universe