... Morningstar gives funds one to five stars based on historical returns versus peers, adjusted for certain risk measures. Investors find the stars easy to navigate, but some investment professionals say they have limits.
In 2009, Michigan-based Mainstay Capital Management, LLC bought shares of White Oak Select Growth, which invests in large growth issues such as Amazon.com Inc. and Google Inc. Several clients asked about the move, noting the White Oak fund carried Morningstar's lowest rating, one star, reflecting a mixed historical performance.
But Mainstay believed the fund's sector, large-cap issues including tech stocks, was due to rebound, and the fund went on to surge 57% that year. Its rating since has risen to three stars.
"This isn't a knock on Morningstar, but it's important that people look at star ratings for what they are, which is a measure of risk-adjusted past performance," says David Kudla, chief executive of Mainstay. ...