“Mutual-fund advertisements are often an exercise in star gazing, with many ads featuring Morningstar Inc.’s star ratings of funds. But investors perusing some recent star-laden ads may be struck by what those ads don’t include: details of actual fund performance,” writes Karen Damato in today’s Wall Street Journal.

“One reason may be that the star glow is more flattering to the funds than a spotlight on the funds’ recent investment-return numbers would be. In fact, a substantial share of stock funds holding even the top five-star ratings from Morningstar have lost money for investors during the past year or so, despite the fact that their longer-term results merited them high Morningstar ratings.”

” ‘You tend to advertise what you have’ and few stock funds have impressive gains to flaunt, says Jim Atkinson, a fund-marketing consultant in Los Angeles. So even when recent fund performance has been poor, 10% of the mutual funds in business for at least three years can boast that they hold Morningstar’s top five-star rating. Another 22.5% of funds are always in the four-star class.”

“Investors facing the proliferation of stars and paucity of performance figures in fund ads need to make sure they understand what the ratings from the Chicago research firm tell them — and what they don’t. That includes the current lesson that as impressive as a cluster of stars might seem, a top rating ‘doesn’t mean that the fund didn’t lose money,’ says Roy Weitz of the FundAlarm Web site.”

“Morningstar’s ratings are based on performance compared with other funds for periods of at least three years; a fund can land in the top echelon partly because it lost less money than others in the same broad grouping of funds. One-third of the U.S.-stock funds with a five-star Morningstar rating had negative returns for the 12 months through February. Three-quarters of the five-star international-stock funds were in the negative column for the same period.”

“Just a few years ago, some funds had considerably more to say about their exact investment performance. During that distant era before the Internet-stock bubble burst, newspapers and personal-finance magazines were full of mutual-fund ads boasting both top ratings and one-year returns of 30%, 60%, and even 100% on some concentrated technology-heavy funds.”