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Correction to Stock Rating Performance Tracking    Back to Corrections List
     
 Corrected 02-15-07
by Morningstar Staff  

In our previously reported performance results for the Morningstar Rating for Stocks, there was an error in the way we calculated time-weighted returns. The error mainly affects returns in the early years of the rating, particularly 2001. The dollar-weighted returns (IRRs) we published are not affected. The star ratings and individual stock returns themselves are also not affected.

In order to calculate time-weighted returns for a strategy like "Buy at 5, Sell at 1," we form a portfolio that invests a hypothetical $1,000 in each stock that hits 5 stars. Because we update our star ratings every night, stocks only begin contributing to the portfolio's performance the following trading day. In our old algorithm, the stock's return was contributing to the portfolio's return the next day (which is correct), but we were inadvertently increasing or decreasing the portfolio's assets on the prior day (which is incorrect). For example, if two stocks hit 5 stars on Tuesday night, the "Buy at 5, Sell at 1" portfolio showed a $2,000 increase in assets on Tuesday, whereas that increase should have occurred on Wednesday. This would have had the effect of slightly damping the portfolio's overall return on Tuesday. Likewise, if two stocks had hit 1 star on Tuesday night and left the portfolio, the effect would have been to slightly magnify returns on Tuesday.

Below, we show time-weighted returns for the "Buy at 5, Sell at 1" strategy that we previously published for the period through June 30, 2006, along with the corrected numbers.

 Buy at 5, Sell at 1 (Time-Weighted)
 
Old
New
Trailing 1-Year
11.35%
11.04%
Trailing 3-Year
16.17%
15.88%
Since Inception*
7.23%
5.10%
Data: Morningstar. Data through 06-30-06
* from inception at 08-06-01

In the table below, we show the old and new results by calendar year. As you can see, the biggest difference is in 2001. This is mainly because the overall portfolio was smaller in the early years of the rating--few stocks had hit 5 stars at that point--and thus more sensitive to the different asset figures.

 Buy at 5, Sell at 1 (Time-Weighted) by Calendar Year
 
Old
New
2001*
4.68%
-1.52%
2002
-28.08%
-29.95%
2003
38.92%
38.28%
2004
21.01%
20.73%
2005
7.98%
7.73%
2006 (first half)
3.01%
2.83%
Data: Morningstar. Data through 06-30-06
* from inception at 08-06-01

In our previous performance summary, we also reported incorrect since-inception figures for the "Buy at 5, Sell at 3" and the "Buy at 5, Sell at Fair Value" strategy. Corrected numbers are below.

 Buy at 5, Sell at 3 (Time-Weighted)
 
Old
New
Trailing 1-Year
14.56%
13.25%
Trailing 3-Year
22.64%
20.85%
Since Inception*
11.75%
5.58%
Data: Morningstar. Data through 06-30-06
* from inception at 08-06-01

 

 Buy at 5, Sell at Fair Value (Time-Weighted)
 
Old
New
Trailing 1-Year
13.75%
12.95%
Trailing 3-Year
20.49%
19.54%
Since Inception*
9.61%
6.10%
Data: Morningstar. Data through 06-30-06
* from inception at 08-06-01
 
   

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