Understanding Morningstar Qualitative Ratings

Morningstar has launched analyst-driven Qualitative Ratings for European & Asian funds

Christopher J. Traulsen, CFA 3 February, 2009 | 8:49AM
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On February 3, 2009, we launched two groundbreaking new tools to help fund investors and their advisers: The Morningstar® Fund Research Report and the Morningstar Qualitative RatingTM for funds.

The Report and Rating are in-depth and transparent, and most importantly, they are also completely independent: Morningstar does not seek or accept payment from fund houses for issuing ratings or reports on funds. We have always believed investors have the right to unbiased research conducted solely on their behalf, and that need is never more apparent than now. With uncertainty roiling global markets, we believe it's paramount that investors and advisers have access to objective research they can trust.

Our independence makes a real difference:

It gives us the freedom to cover the funds that investors need information on. In all, we have over 700 funds targeted for coverage in the UK alone, and more than 3,000 funds targeted across Europe and Asia.

It allows our analysts to base our coverage on where investors put their assets--we aim to cover up to 70% of assets under management in each peer group, and we leave room to add smaller funds we think merit coverage. Put differently, we aim to cover funds with significant investor assets, regardless of whether they are good, bad, or ugly--if investors are in a fund, they have the right to high quality research on that offering, and we will strive to deliver it. Because we don't rely on performance screens to dictate our coverage list, funds won't be dropped from coverage during a period of underperformance--indeed, we believe that's the very time when investors most need an informed opinion on a fund. Moreover, we'll cover small funds and/or new funds if we think there is investor interest or that we can add something of value to investors by doing so.

Finally, being independent allows us to be forthright in our ratings and written opinions. Our analysts work for you, not for the fund companies. Our ratings scale reflects this--instead of having three "good" ratings as is common practice with other services, we have five ratings that span the quality spectrum: Elite, Superior, Standard, Inferior, and Impaired.

We assess five key areas for each fund: People, Parent, Process, Price, and Performance. Using our own industry leading in-house data, public documents, and comprehensive interviews with fund managers and key fund company executives, our analysts evaluate each of these areas in depth. Their assessments of each area are thoroughly debated and discussed by senior researchers, and then aggregated into the final rating. You can read a detailed explanation of our ratings methodology here.

Although the Morningstar Qualitative RatingTM for funds gives investors a quick snapshot of our opinion of a fund, the Morningstar® Fund Research Report is its essential complement. The written "Opinion" section on the first page of the report explains the basis for the Rating, while subsequent sections give more detail on each of the five underlying areas. It also seeks to elevate the debate beyond "good fund"/"bad fund" and to help investors and their advisers understand the biases in a fund's portfolio and how they are likely to influence its performance in various market environments. We supplement the discussion with rich, industry-leading data, including proprietary Morningstar holdings metrics and graphics, that enable investors to easily gauge the risks embedded in a fund's portfolio. Our goal is to ensure that investors and their advisers understand the proper role for a fund in a portfolio and to have the right expectations for the investment.

While these Reports and Ratings are new to the UK, qualitative fund research has been at the centre of Morningstar for more than 20 years now. In addition to our team of 28 fund analysts across Europe and Asia, eight of which are based in the UK under the leadership of UK Director of Fund Research Jackie Beard, we have extensive teams conducting and publishing qualitative fund research in China, Australia, Canada and the US. In every region, we base our analysts in the markets where the funds they cover are managed, and we have analysts in major cities throughout Europe and Asia and around the world. Our fund analysts also benefit from access to Morningstar's equity research team--one of the largest independent equity research staffs in existence today. We believe this combination of global scale and local expertise puts us in an ideal position to better serve investors.

The new Morningstar Qualitative RatingTM and Morningstar® Fund Research Report give investors and advisers two great new tools to make better decisions and truly understand their investments. But don't just take my word for it--we have posted a table of the currently available Ratings and Reports on funds available for sale in the UK below, and I encourage you to read through them. As always, we value your feedback, so please let us know what you think, and keep checking back as we build our library of Ratings and Reports.

View Research Reports for Funds Available for Sale in the UK

Read about the Morningstar Star (Quantitative) Rating 

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

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.