Fund ratings. Any good?

Ideally fund ratings should give investors a guide as to the likely risk and return of a fund (i.e., investment). However there are plenty of anecdotal examples of where the 'system' doesn't work (err, Enron, Worldcom, HIH etc etc). From (you guessed it) The Australian:

David Gallagher, (a colleague of mine and) Associate Professor of finance at the Australian School of Business at the University of NSW, says the big question is: what does a ratings represent?

"Intuition says a rating should be predictive," he says.

"What is the point of having a rating if it doesn't help make better investment decisions?

"You have to expect that on average a five-star rating would perform in the future, but there is no evidence to suggest it is the case."

Hmm, if you're paying these investment rating agencies, then this is not good news. However it is consistent with the idea that it's difficult for anyone (even the ones you'd expect to) to consistently outperform the market [note: that's difficult, but not impossible. See Warren Buffet and Kerr Nielson]. It also suggests that even small retail investors, if they do a sensible business analysis, may be able to spot some sound investment opportunities.

.