Morningstar to Introduce New Forward-Looking Ratings

The ratings and reports will be based on analysts’ convictions about a fund’s ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. The company plans to launch the new ratings and research reports in the United States, Canada, Europe, Asia, Australia, and New Zealand in the fourth quarter.  

The firm explained that the new Morningstar Analyst Rating for funds is a qualitative, forward-looking measure based on analyst research, whereas the Morningstar Rating for funds, or the “star rating,” is a purely quantitative, backward-looking measure that rates historical performance based on risk- and cost-adjusted returns without any input from Morningstar’s analysts. The new analyst ratings will not replace the star ratings, and the existing star rating methodology will not change.   

Morningstar will not charge fund groups to be rated, and its decision to rate and report on a specific fund is made solely by the analyst team based on factors such as investor interest and asset size. In the United States, the new ratings and research reports will replace the company’s “Analyst Picks and Pans,” a proprietary list of most-favorite and least-favorite funds chosen by Morningstar’s analysts in each investment category. In markets where Morningstar already has analyst-driven ratings, such as the United Kingdom, Europe, Asia, and Australia, the new system will replace the previous analyst ratings scale.  

According to a press release, the new Morningstar Analyst Rating for funds will be assigned as one of five ratings—AAA, AA, A, Neutral, or Negative.  

The ratings scale is as follows: 

• AAA: Best-of-breed fund that distinguishes itself across the five pillars and has garnered the analysts’ highest level of conviction; 
• AA: Fund with notable advantages across several, but perhaps not all, of the five pillars—strengths that give the analysts a high level of conviction; 
• A: Fund with advantages that outweigh any disadvantages across the five pillars, with sufficient level of analyst conviction to warrant a positive rating; 
• Neutral: Fund that isn’t likely to deliver standout returns, but also isn’t likely to significantly underperform; and 
• Negative: Fund with at least one flaw that is likely to significantly hamper future performance, and is considered an inferior offering to its peers. 

The Morningstar Analyst Rating™ evaluates funds on five key pillars, considering both numeric as well as analyst-driven factors.  

The five pillars are: 

• People: Quality of a fund’s investment team, based on factors including its experience, stability, structure, communication, and alignment of interests with fund shareholders; 
• Process: Quality of investment process—in terms of both security selection and portfolio construction—and whether it is sensible, clearly defined, and repeatable. Also judges whether the process is effectively implemented and whether the portfolio is consistent with the stated process; 
• Parent: Quality of the parent organization, including capacity and risk management, recruitment and retention of talent, incentive pay, and culture of stewardship; 
• Performance: Evaluation of long-term returns, consistency of performance in different market conditions, and performance relative to manager changes and changes in asset size; and 
• Price: Evaluation of annual expense ratios, and performance fees if appropriate, within the context of the relevant market or cross-border region. 

Financial advisers will have access to the Analyst Ratings and the in-depth Morningstar Global Fund Research Reports for funds available for sale in the United States through Morningstar’s adviser software products such as Morningstar Office. The in-depth reports include additional analysis about each pillar as well as graphics, data, and other statistics.  

The Analyst Ratings and in-depth Global Fund Research Reports for all the funds that Morningstar covers worldwide will be available in Morningstar Direct, the company’s Web-based global research platform for institutional investors.  

More information is at http://global.morningstar.com/AnalystRatingForFunds.