Currently in the initial developmental stages, S&P’s new methodology intends to build on the existing “STARS” system of evaluating the quality of a mutual fund’s underlying holdings. S&P expects to complete its research as early as this summer with integration into its funds research and investment analysis platforms immediately following, according to a news release.
“STARS” rankings reflect the qualitative opinions of S&P’s equity analysts on the price appreciation potential of US stocks for the next six to 12-month period. The rankings range from five-STARS (strong buy) to one-STARS (sell).
Applying the system to determine the price appreciation potential of a mutual fund, S&P fund analysts intend to align a stock’s equity “STARS” ranking with the holdings information in its mutual fund database. S&P will then examine two key factors for each fund:
- the growth and stability of the earnings and dividends of each of the fund’s holdings by considering its S& P Earnings and Dividends Ranking
- the fund’s standard deviation and turnover ratio.
S&P then intends to run a series of regression calculations to determine the price appreciation potential of the mutual fund, one that correlates strongly to the quality of its underlying holdings.