Date of Award


Degree Type


Degree Name

Doctor of Philosophy


School of Finance and Business Economics


Faculty of Business and Public Management

First Advisor

Professor Dave Allen


Managed fund ratings have become an increasingly available piece of information to guide choice of managed funds. From the perspective of modem portfolio theory and specifically within the efficient markets paradigm, the value of such information is questionable. No profitable relationship should be able to be demonstrated between a fund rating and its subsequent performance. This thesis investigates the relationship between fund ratings and subsequent performance using Morningstar ratings, the most prominent Australian rating provider, for two of the largest and most important groups of managed funds. A positive relationship between a fund's star rating, its quantitative and qualitative components, or quantitative sub-components and subsequent performance is the: least supported relationship. Four major rating companies compete for the attention of individual investors and financial advisers, two key target markets of managed fund rating suppliers. A survey of a sample of informed individual investors from the Australian Shareholder Association demonstrates that a consumer behaviour framework may better explain the role of ratings to individual investors. Ratings act as both an information source and selection criteria. A survey of a sample of financial advisers from the Financial Planning Association confirms that ratings are used by advisers, primarily to help satisfy 'reasonable basis' tests imposed on financial advisers when making recommendations to investors. For groups in each sample a link between a rating and subsequent performance was the main purpose they used a rating. The largest group of both samples reported that they considered the main purpose of a rating was to identify well managed/administered funds. The construction of ratings in Australia provides a contrast with overseas counterparts in the significance attached to qualitative or "forward-looking" components. Each rating company strongly promote their ability in making these qualitative assessments and seek to articulate the difference in their ratings to users. The importance attached to the range of possible inputs to ratings varies by identifiable clusters of individual investors and financial advisers. The largest cluster in each sample considers historical performance inputs more importantly than the rating suppliers. The smallest cluster in each sample considers the forward-looking inputs as the most important. This is in contrast with the rating suppliers who emphasise these inputs. Further there appears to be a lack of discrimination in the choice of rating to rely on given the reported importance attached to various inputs and the corresponding importance given them by the various rating suppliers.