Morningstar’s Latest Attempt to Rate Funds Falls Flat

Wow. I have to admit to being completely underwhelmed by Morningstar’s latest attempt at “rating” funds on qualitative factors after having spent years defending the utility (or futility) of its quantitative star rankings.

Of course, I’m just looking at the Vanguard funds that won “gold,” “silver” and “bronze,” not to mention the “neutrals” handed out to the Vanguard Explorer Investor (MUTF:VEXPX), Vanguard Morgan Growth Investor (MUTF:VMRGX) and Vanguard Windsor Investor (MUTF:VWNDX).

Almost one-third of the Vanguard’s 39 gold-medal funds are Target funds, from the Vanguard Target Retirement Income Fund (MUTF:VTINX) all the way up to the Vanguard Target Retirement 2055 Fund (MUTF:VFFVX). And of the 27 funds that aren’t Target funds, 10 are stock index funds and two are bond index funds. No surprise there.

Some of my favorites also got gold, like the Vanguard Capital Opportunity Investor (MUTF:VHCOX), Vanguard Dividend Growth Fund (MUTF:VDIGX), Vanguard Health Care Investor (MUTF:VGHCX), Vanguard Mid-Cap ETF (NYSE:VO), Vanguard PRIMECAP Investor (MUTF:VPMCX), Vanguard PRIMECAP Core Fund (MUTF:VPCCX), PRIMECAP Odyssey Growth Fund (MUTF:POGRX), PRIMECAP Odyssey Aggressive Growth Fund (MUTF:POAGX), PRIMECAP Odyssey Stock Fund (MUTF:POSKX), Vanguard Selected Value Fund (MUTF:VASVX) and Vanguard Wellington Investor (MUTF:VWELX). Congrats!

But how do you explain that Vanguard Total Stock Market Index Inst. (MUTF:VITSX) is a gold and Vanguard Institutional Index Inst. (MUTF:VINIX) (an S&P 500 index fund) is a gold, but Vanguard 500 Index Investor (MUTF:VFINX) (which also tracks the S&P 500 index fund, obviously) a mere silver? Could it possibly be that the 0.04% expense ratio for VINIX (which has a $5 million minimum) somehow trumps the 0.17% expense ratio on the $3,000 minimum VFINX? Let me get out my checkbook …

How is it that Vanguard Emerging Markets Stock Index Investor (MUTF:VEIEX) — which probably has pulled in more money from investors in 2011 and is a better proxy for emerging markets than most of the funds the mutual fund industry has cast into the market — only rates a silver?

And why would Vanguard LifeStrategy Growth Fund (MUTF:VASGX), Vanguard LifeStrategy Moderate Growth Fund (MUTF:VSMGX) and Vanguard LifeStrategy Conservative Growth Fund (MUTF:VSCGX) all rate silver, but Vanguard LifeStrategy Income Fund (MUTF:VASIX) doesn’t make the cut? Size?

Finally, despite the cheerleading and championing of one of Vanguard’s biggest losers, I wasn’t surprised to see that Vanguard U.S. Growth Investor (MUTF:VWUSX), which was run until a year ago by the growth team at AllianceBernstein, hadn’t made the medals podium. Morningstar couldn’t keep up the happy talk on that one forever. But why wasn’t it listed along with AllianceBernstein Large-Cap Growth Fund Class A (MUTF:APGAX) in the “negative” — or what I’d call the “losers” — category? Same managers, same lousy track record.

Let’s hope Morningstar isn’t tarred with the same brush as the one used on the International Olympic Committee.

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