Style Jumping to Boost Morningstar Fund Ratings

Do some mutual fund managers game Morningstar ratings/benchmarks by shifting the styles of their funds? In their September 2024 paper entitled “Box Jumping: Portfolio Recompositions to Achieve Higher Morningstar Ratings”, Lauren Cohen, David Kim and Eric So investigate how mutual fund managers exploit investor reliance on Morningstar ratings by adjusting holdings to jump their funds into size/value styles with low benchmarks. They focus on active U.S. and global equity mutual funds during the period from five years before to five years after June 2002, when Morningstar began rating funds by style. They include dead funds to avoid survivorship bias. Using Morningstar style assignments, Morningstar ratings and performance data for active equity mutual funds during 1997 through 2007 (with some data through 2022), they find that:

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