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Low-Quality Funds with High Star Ratings

Funds with high star ratings don't always win our favor.

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Morningstar fund analyst Dan Culloton doesn't much like  Jacob Internet (JAMFX), despite its 2003 return of 101%. In fact, the fund has the dubious distinction of being the only fund with a 5-star rating now included on our Analyst Pans list.

Many might wonder how a fund with 5 stars could earn the scorn of a Morningstar mutual fund analyst. Culloton's explanation is simple: Over its lifetime the fund has lost more than 30% annually, it’s a highly volatile fund even compared to its highly volatile category peers, and it's very expensive. A high price tag, above-average volatility, and heavy losses--that's a recipe to avoid. The fund earns its 5-star rating in an interesting fashion, by the way. Having been around for fewer than five years, its rating looks only at the trailing 36 months. Thus, its very hot run from late 2002 through early 2004 overwhelms its poor absolute and relative performance that came before. As we say at Morningstar, no one data point--not even the Morningstar star rating--ever tells the whole story.

While Jacob Internet is the only 5-star Analyst Pan, there are a few 4-star Analyst Pans that you can find with a very quick search: Simply screen for Analyst Pans and a Morningstar Rating of greater than or equal to 4 stars using the  Premium Fund Screener.

Todd Trubey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.