Abstract
We investigate Morningstar’s new qualitative, forward-looking analyst ratings, which reflect independent analysts’ expectations of a fund’s future performance. We find relatively higher abnormal flows to funds receiving higher ratings, particularly in retail funds, suggesting that the average retail investor values the analyst’s subjective views when allocating their wealth. Performance tests show that investors would have earned significantly higher returns over horizons of 18 months or more by investing in funds with the highest analyst-convictions. These results suggest that independent research that expands the information set to include qualitative elements may help investors make better investment allocation decisions.
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