How do Morningstar's Medalist Ratings Work?

One year on from the biggest consolidation of ratings methodologies in Morningstar's history, we remind investors how it all works

Lee Davidson 9 May, 2024 | 3:52PM
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In the past, Morningstar used several different ratings systems.

There was the Morningstar Analyst Rating. There was the Morningstar Quantitative Rating.

Today, both are combined. The result is a single forward-looking rating called the Morningstar Medalist Rating.

This change happened in 2023, and was the result of a significant simplification of strategy search, investment selection, and our monitoring of the wider investment universe.

Overall, it brings our best thinking on a huge range of data points into one house view.

How Our Ratings Have Changed Over Time

Morningstar has been doing research on active and passive funds since 1986.

From November 2011, this research was expressed globally through the Morningstar Analyst Rating For Funds. At the time, this was a rating given to funds by Morningstar's manager research analysts, based on qualitative analysis.

Then, in 2017, Morningstar expanded its manager research.

This led to the launch of a Quantitative Rating for Funds, which used algorithmic techniques and inheritance logic to assign ratings to strategies and vehicles that Morningstar's manager research analysts didn't personally cover.

This Morningstar Quantitative Rating was designed specifically to mimic analyst decision-making as much as possible via a quantitative approach.

Today, the Morningstar Medalist Rating is the full and final expression of Morningstar's forward-looking view on all rated strategies – the result of both approaches in one.

Why Did Morningstar Change to a Medalist Rating?

The Morningstar Medalist Rating provides investors with a more simplified and expansive rating system. But the real reason we've done this is because we know investors are faced with more choice than ever before.

Over the past 20 years, the number of managed investment products has grown steadily at around 11% per year. On average, during the past two decades, approximately 3,000 new share classes were opened each month. At the end of 2022, Morningstar's databases contained over 750,000 live investment vehicles globally.

Morningstar has one of the largest manager research staffs in the world, with over 150 analysts conducting qualitative due diligence. However, even a staff this large cannot keep pace with the growth of the managed investment universe.

But it's not about us. It's about you.

The reality is that having two segregated forward-looking rating systems in our software and reports has not been the easiest thing for our clients, customers, and readers to navigate.

Before, if an investor wanted to "screen" for Morningstar's best ideas, for example, they had to juggle multiple signals and methodologies. With the Morningstar Medalist Rating, this is much easier to do.

Does This Change Morningstar's Ratings Methodology?

The Morningstar Medalist Rating doesn't change our underlying methodology.

As a result, we do not expect any upgrades or downgrades for either Analyst Ratings or Quantitative Ratings.

The primary change relates to the way ratings are actually displayed on our platforms.

Specifically, the data point names will change from "Morningstar Analyst Rating" and "Morningstar Quantitative Rating" to "Morningstar Medalist Rating."

Additionally, we've removed the superscript "Q" from the overall rating levels – Gold, Silver, Bronze, Neutral, and Negative – for all strategies currently rated by the Morningstar Quantitative Rating. Only where an algorithmic technique was used to assign a pillar ratings is it retained. In such cases, authorship is attributed with the words "Autogenerated by Morningstar Manager Research."

Morningstar Medalist Ratings: Final Things to Note

Finally, we've introduced two new data points to provide additional transparency on how ratings are derived.

The first data point, called "Analyst Assigned %" denotes the extent that analysts were involved in the assignment of individual pillar ratings.

The second data point, called "Data Availability %" denotes the extent to which underlying data inputs were available for the algorithmic approach to pillar ratings at the time of the rating assignment. Both data points will be available for all rated vehicles.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Lee Davidson

Lee Davidson  is Head of Manager and Quantitative Research.

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