A new fund rating system has emerged that seeks to offer ratings based on academic models of funds' future performance. Arlington-based research firm MutualDecison launched Fund Grade , its first mutual fund rating system, this Thursday. The system considers over 3,600 U.S equity funds with factors that evaluate return gap, active share, judging fund management and forecasted alphas.

William Byrnes, MutualDecision CEO, told MFWire that the models have been in the works since early 2006, and were developed in conjunction with professors from University of Michigan, Georgetown and Rutgers University. The MutualDecision website itself has been functional since late 2008.

"The rating system is really unique and special because it is based on four leading models. The models are based on 20 years of data, and each case identifies a variable that is indicative of superior future performance," Byrnes noted.

In terms of judging fund managers, one model looks at the performance of 8000 mutual funds, tries to find a unique variables to success and then backtests to lend support to the results.

"What the professors are saying is that very few funds outperform the markets, but depending on the individual study 8-10 percent do consistently outperform- the goal is to identify these funds," Byrne said.

"Morningstar is the target," Byrnes added. While the MutualDecision site currently looks at domestic equity mutual funds, ETFs, indexed funds and foreign equity will be added further down the road.

John Rekenthaler, vice president of research for Morningstar, spoke with the MFWire regarding the possible predictive power of Morningstar's own rating system.

"We've always said that a star rating is an introduction, not a conclusion," noted Rekenthaler. He added that Morningstar's five-star rating system has been subject to academic scrutiny, and that William Goetzmann of Yale University found the star rating to have some moderate predictive power. 

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