Morningstar Launches SMA Research Products

October 30, 2003 ( - Separately managed account (SMA) investors and financial advisors now have another research source with word that Morningstar has unveiled an SMA rating system based on its risk-adjusted return methodology.

According to a news release, the investment research company is also launching the Morningstar Flexibility Measure for separate accounts, which helps advisors and investors measure the level of customization offered by each separate account. Both the rating system and Flexibility Measure will be housed in Morningstar DataLab, a research program for money managers.

Both tools will also be available in November in Morningstar Principia Separate Accounts, an investment research and management program for financial advisors and by the end of the year in Morningstar Advisor Workstation, an online investment planning system.

“Financial advisors and other professional investors have been telling us there’s a need for more transparency and reliable, consistent data in the separate account industry,” Don Phillips, Morningstar managing director, said in a statement. “The Morningstar rating for separate accounts looks at historical data for two fundamental traits – risk and return – and compares them against other separate accounts in the same Morningstar category to help advisors conduct detailed peer analysis with one familiar tool rather than with numerous rankings and metrics.”

Five-Star Rating System

The Morningstar Rating for separate accounts is a quantitative assessment of a separate account’s past performance – both return and risk- as measured from one to five stars. It helps identify management teams that are adding value over time, compared with others in their Morningstar category, according to the company.

Morningstar ranks all separate accounts in the same category by their risk-adjusted return scores and assigns stars based on the following curve: the top 10% receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star. Separate accounts are rated for up to three time periods – three, five, and 10 years. These ratings are weighted and combined to produce the overall Morningstar rating.

Separate accounts that do not have ratings can be divided into two groups: those that do not qualify to be rated and those that did not participate. To qualify for a Morningstar rating, a separate account must be at least three years old and have at least four Morningstar category peers that are also being rated. The Morningstar rating for separate accounts rates only firms that supply performance information that complies with Association for Investment Management and Research (AIMR) guidelines.

To ensure that the basis for the ratings is consistent, Morningstar rates only separate accounts that submit sufficient and timely performance and portfolio data. Morningstar will assign a “DNP” or “Did Not Participate” label to separate accounts that do not meet the quarterly data submission deadline, provide a representative portfolio, or supply at least three years of consecutive monthly returns. The “Did Not Participate” label will help investors differentiate among those separate accounts that are not eligible for a Morningstar Rating – because of a short history or a lack of suitable peers – and those that are not submitting enough data.

SMA Services

In addition to the star rating, Morningstar is also introducing the Flexibility Measure for separate accounts, which helps financial advisors select separate accounts based on the number of options and custom services a particular separate account offers. To calculate the Measure, Morningstar surveys asset managers regarding 18 types of special services and asks whether each service is offered proactively, upon request, or not at all.

Morningstar assigns additional points to separate accounts that proactively offer services to investors. The ratio of the points scored to the total number of possible points is multiplied by an adjustment factor for account size. Each separate account is then ranked by its final score. The top third is labeled “Highly Flexible,” the next third is named “Moderately Flexible,” and the bottom third is considered “Less Flexible.”

A fact sheet with more information on the Morningstar Flex Measure is available at .