When Morningstar Downgrades a Fund, Investors Take Note
Our study shows that fund flows respond to Morningstar Medalist Rating changes.
Several studies have found a link between fund flows and the
The short answer is yes, there is a clear connection between the two.
Active Funds Show a Strong Link Between Morningstar Ratings and Flows
The new study (which follows on from one published by Morningstar in 2023) looks at Morningstar Medalist and star rating changes for US funds from 2011 through 2025. Following a rating change, we tracked funds’ net flows and organic growth rates across multiple time periods and benchmarked those flows against Morningstar Category peers.
Active funds drew average net inflows of $42 million one year after a rating upgrade and $174 million after two years. Downgrades cut deeper, with funds shedding $116 million after one year and $222 million after two. Passive funds, by contrast, continued to attract inflows even after rating downgrades, reflecting the broader shift toward low-cost indexing. In addition, upgraded passive funds gathered more than twice the inflows of downgraded ones two years after the rating change: $526 million versus $205 million.
Active Funds: Average Net Flows
Passive Funds: Average Net Flows
Morningstar Analyst Conviction Matters
Gaining—or losing—a positive recommendation from Morningstar’s Manager Research team also coincided with changes in flows. Funds upgraded to Gold, Silver, or Bronze Medalist Ratings had an organic growth rate of 39% on average in the following two years. (We calculated organic growth by dividing the sum of flows during the period by the fund size at the start of the period.)
Conversely, funds downgraded to Neutral or Negative shrank 14%—an asymmetry of nearly 3 to 1. Compared with category peers, the gap was just as striking: Upgraded funds grew 42 percentage points faster, while downgraded funds shrank 12 percentage points more.
The pattern held across asset classes as well. Upgraded equity, fixed-income, and multi-asset and alternative funds grew faster than peers by 43, 29, and 62 percentage points, respectively, two years after an upgrade.
Where Medalist Ratings and Star Ratings Diverge
On the upside, star ratings and Medalist Ratings showed nearly identical flow patterns. Both reached about 40% organic growth two years after an upgrade, on average, outpacing category peers by over 40 percentage points.
However, downgrades tell a different story. Across every period we measured, Medalist Rating downgrades produced steeper outflows than star rating downgrades. After two years, star rating downgrades saw negative 2% organic growth, while Medalist Rating downgrades saw negative 12%—an asymmetry of 6 to 1. Both types contracted more than category peers, but Medalist Rating downgrades did so by more than twice the magnitude of star rating downgrades: negative 10 percentage points versus negative 4.
Medalist and Star Ratings Downgrades for Active Funds: Organic Growth
Medalist and Star Rating Downgrades for Active Funds: Difference in Growth Rates vs. Category Peers
Investors Interpret Medalist and Star Rating Downgrades Differently
The two ratings send different signals. A star rating downgrade indicates recent underperformance, which investors might write off as a temporary rough patch that will eventually reverse. On the other hand, a Medalist Rating downgrade reflects analysts’ reassessment of a fund’s long-term prospects, such as a change in the team, an erosion of process, or a less supportive parent. Investors appear to treat that drop in forward-looking conviction as the more serious warning—and move their money accordingly.
The star rating remains a useful summary of where a fund has been. But when Morningstar’s analysts change a fund’s Medalist Rating, and revise their conviction about where a fund is headed, the market listens—and on the downside, it listens even closer.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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