This paper studies the effect of Morningstar ratings on fund flows and fund performance predictability using equity funds from Norway. Controlling for a number of variables proxying for fund and firm visibility, we find that fund flows respond asymmetrically to changes in Morningstar ratings. Specifically, 4- and 5-star rated funds get more flows, and funds upgraded to 5-star get significantly more flows not only in the next month, but also over the following 12 months. Downgraded funds suffer outflows, but the results are not statistically significant. We also find evidence of long-term performance predictability for top-rated funds. As the mutual fund industry develops worldwide, our results suggest that Morningstar has been successful in bringing its brand name to markets outside the United States, and that Morningstar ratings are a valuable tool for helping investors make strong investment decisions.

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Mutual funds,Morningstar ratings,Fund flows,Fund performance,Investor behavior