Morningstar avoids legal stoush with Frank Russell
Morningstar Inc, the Chicago based parent of Morningstar Research, has confirmed that it will not be pursuing legal action against theFrank Russell Companyover a report by the asset consulting group which criticised Morningstar’s star ratings system.
In a statement issued to Frank Russell today, Morningstar Inc confirmed that it would not push ahead with any suit filed or intended to be filed against Frank Russell by former Morningstar Research chief executive Graham Rich.
Rich, who was dismissed by the Morningstar Inc board last weekend, had threatened legal action against Frank Russell after reportedly alleging the Russell report was defamatory and had caused the Morningstar star ratings model to suffer reputational damage.
The report, initially released by Frank Russell managing director Alan Schoenheimer in New Zealand last month, concluded that Morningstar’s star rating system was not a reliable indicator of future short-term performance.
The report found that $1000 invested in an average five star rated Morningstar fund between June 1998 and June 2000 would have produced $1460 at the end of the two year period. But $1000 invested in a three and four star fund would have produced $1481 and $1588 respectively, despite the funds’ lower rating.
Speaking at the Financial Planning Association (FPA) conference in Brisbane last week, Schoenheimer indicated the report was compiled to alert investors to the limitations of star ratings systems.
“Star ratings are used to market many products and services — from movies to holidays to restaurants. They are eye-catching and powerful marketing tools, I can understand their attraction to managers and investors alike,” he says.
“However, the consequences of relying solely on star ratings for making a decision on a future investment are just too great. If you buy a five star ranked fund today, don’t bet on it delivering you a five star return in a year’s time.”
A legal confrontation with Frank Russell would have added to Morningstar Inc’s woes following its highly publicised falling out with Rich.
Morningstar Inc, which has questioned Morningstar Research’s financial management under Rich, had been embroiled in a bitter legal battle with the former chief executive after he sought, unsuccessfully, to challenge his dismissal in the Supreme Court.
In an interview with Money Management today, Morningstar Inc managing director Don Phillips indicated the group would inject $1 million into Morningstar’s Australian operations to save it from insolvency now that Rich’s departure has been confirmed.
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