Almost 130 million Americans invest in mutual funds or other pooled investment vehicles. That number represents more than 54% of American households. No single investment vehicle is more widely owned than mutual funds.
But that hasn’t always been true.
The mutual fund concept dates back to the 18th century in Europe, but the modern mutual fund began in the United States with the launch of the Massachusetts Investors Trust in 1924. Growth accelerated after World War II, as rising incomes and expanding capital markets encouraged broader participation. But by 1980, U.S. mutual fund assets totaled about $135 billion, a small percentage of overall investments.
The real explosion began in the 1980s and 1990s. Several forces contributed to this growth: the rise of retirement plans like 401(k)s, declining brokerage commissions, and a long bull market in equities. By 2000, mutual fund assets in the United States had surged to approximately $7 trillion. This represents more than a 50-fold increase in just two decades, signaling a fundamental shift in how Americans invested.
But financial historians say a major reason for the growth was Morningstar’s ratings of mutual funds. Founded in 1984, Morningstar introduced a simple but powerful idea: rating mutual funds using a 1-to-5-star system based on risk-adjusted performance. The system allowed investors to quickly compare funds within the same category, turning complex financial data into an easily digestible signal. Funds in the top 10% of their category receive five stars, while the bottom 10% receive one star.
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This simple rating system had enormous consequences. Academic research shows that Morningstar ratings directly influence investor behavior and fund flows. For example, a fund receiving a new 5-star rating experienced a 53% increase in net inflows—about $26 million in additional investment over six months—compared to normal expectations.
In short, Morningstar’s ratings were not merely informational, they actively redirected billions of dollars across the industry, and they increased confidence in an entire asset class, causing the entire mutual fund industry to grow exponentially.
This logic is behind MinistryWatch’s rating system. We want to bring transparency, accountability, and increased credibility to the Christian nonprofit sector. Our rating system is not merely about assigning scores. Our ratings reflect a philosophy that donors deserve clear, trustworthy information when deciding where to give. To that end, several key reasons explain why MinistryWatch has developed and continues to use its rating framework.
Financial Efficiency. MinistryWatch’s Financial Efficiency Rating asks the question: If you give a dollar to a ministry, how much of that dollar goes to ministry, and how much of it goes to administrative, fundraising, or asset accumulation?
Our Financial Efficiency Rating resembles Morningstar’s 5-star rating system. We take data from an organization’s Form 990, put that data through a simple formula, and produce ratios we then compare to other ministries in the same category. (For a more complete explanation of our Financial Efficiency Rating, click here.) The top 20% get a 5-star rating, and the bottom 20% get a 1-star rating.
Over the years, I have had meetings, zoom conferences, and phone calls with scores of ministry executives who ask me how to raise their Financial Efficiency scores, and my answer is almost always the same: “It’s not magic. It’s math.” One of the strengths of this system is that it is obvious to ministry leaders and donors alike where a ministry is doing well or poorly. Our advice to donors is to give money to ministries with at least average (3-star) ratings. Our advice to ministry leaders is to strive for at least a 3-star rating in your ministry category.
Transparency Grade. The Bible says of Christians: “You are all children of the light and children of the day. We do not belong to the night or to the darkness” (I Thess. 5:5). Transparency and accountability should be core values for Christian ministries. That is why we added a Transparency Grade to allow ministries that are rising to the top levels of transparency and accountability to shine. To get an “A” Transparency Grade, an organization must file a Form 990, must post its annual audit on its website, and must be a member of the Evangelical Council for Financial Accountability (ECFA).
In recent years, we see more ministries fail to file a Form 990. We believe this failure to file is just that: a failure. It is a failure to live up to the highest standards of transparency and accountability. It is important for ministry leaders and donors to know that ministries that fail to file a Form 990 are outliers, in the bottom 15% of all ministries. Only about 200 of the 1,400 ministries in the MinistryWatch database fail to file. I would ask ministry leaders: Why would you want to be in the bottom 15%? I would ask donors: Why would you support ministries in the bottom 15%?
For a fuller explanation of our Transparency Grade, click here.
Donor Confidence Score. As our rating system evolved, we realized it was possible to have a very high Financial Efficiency Rating, but still be engaged in questionable practices, especially related to board governance and character issues of the senior leadership of the organization. So, we created a Donor Confidence Score to take financial efficiency, transparency, and additional issues into account. This is the score I tend to look at when I want to see how a ministry is doing. It is our most integrated and well-rounded rating.
For a fuller explanation of our Donor Confidence Score, click here.
No Rating System Is Perfect
Most objective observers agree that Morningstar’s rating system revolutionized mutual funds. It gave investors confidence in the asset class, and that meant money poured in. Mutual funds have grown from that 1980 level of $135 billion to more than $30 trillion today.
However, even Morningstar’s ratings are not without criticism. For example, because the ratings are based on past performance, they do not necessarily predict future results. During the 2008-09 financial crisis, many 4- and 5-star funds performed poorly.
There are some important questions you could ask about MinistryWatch’s rating system. Why does ECFA membership matter? What about an organization that posts a Form 990 on its website but doesn’t file it with the IRS? Shouldn’t these ministries get some credit for transparency? The contention that a board should have at least five and no more than 12 members seems arbitrary. Why should a ministry that has 12 board members get more points than one that has 13?
These are good questions, and in future editorials I will answer these and other challenges we have heard to our rating system.
For now, though, I would like to leave you with this: We believe ratings provide a valuable service both to donors and to ministry leaders. We do regular surveys of our readers, and one of the questions we ask is: “Do you use MinistryWatch to help you make giving decisions?” Almost two-thirds of respondents answer “yes” to that question. We then ask, “Have you ever changed a giving decision based on information you learned at MinistryWatch?” About 40% of respondents answered “yes” to that question.
Your answers to these questions are powerful endorsements of why we do what we do.