Enhanced Morningstar Analyst Ratings for Funds

We've launched our revised Morningstar Analyst Rating scale, to be complemented by more-in-depth reports in early 2012

Christopher J. Traulsen 15 November, 2011 | 6:50PM
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Morningstar launched its analyst-driven ratings for funds in Europe and Asia in February 2009. Since then, our team has published ratings and in-depth reports on 1,145 funds, published in eight languages. We seem to have struck a chord with you—collectively the reports have been downloaded more than 2 million times. But we think we can make our work even better. To do that, today we are launching a revised Morningstar Analyst Rating scale that will be used by our 90+ qualitative fund analysts around the world, and new, even more-in-depth reports to complement the ratings will arrive in early 2012.

Out with the Old, in with the New
The principle change is to the ratings scale we use to express our analysts’ opinions.

The new Morningstar Analyst Rating scale is as follows:

Positive Ratings:

  • Gold: Best-of-breed fund that distinguishes itself across the five pillars and has garnered the analysts’ highest level of conviction;
  • Silver: Fund with notable advantages across several, but perhaps not all, of the five pillars—strengths that give the analysts a high level of conviction;
  • Bronze: Fund with advantages that outweigh any disadvantages across the five pillars, and 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 that has at least one flaw likely to significantly hamper future performance, and is considered an inferior offering to its peers. 

Previously, we used a symmetric five-tier scale that included two positive ratings, a neutral rating, and two negative ratings (Elite, Superior, Standard, Inferior, and Impaired). The new scale bundles our negative views into a single rating and we now have three levels—Gold, Silver, and Bronze—to provide an additional level of detail in our positive ratings. This gives investors more granular insight into our views on the funds they are likeliest to own and allows us to more clearly signal to investors whether our conviction level on positively-rated funds is growing stronger or weaker.

Rest assured, however, that there is no change to our research approach: Our analysts continue to rate funds based on their conviction in a fund’s ability to outperform its benchmark or peers over the long term. To arrive at a rating, they evaluate five key pillars our experience has shown us are critical to a fund’s ability to succeed: People, Process, Parent, Performance, and Price. For more information on the methodology, click here. There is also no change to our business model: As before, we do not accept payment to rate funds, and the ratings decisions lie solely in the hands of our independent analysts.

Coming Soon: Enhanced Reports
When we launched our ratings in 2009, we believed it was essential to provide investors with an in-depth report to give them full transparency on the rationale for the ratings decision taken, and our views on each of the five pillars we evaluate. That report is still in place today, but in early 2012, we will replace it with a greatly enhanced, more in-depth format with even richer proprietary analytics and data to support our analysts’ work. Among these will be a summary scorecard for the five pillars, with each pillar graded as positive, negative, or neutral, to provide even greater transparency around the rationale for the rating.

The purpose of our research is to help you, our users, make better investment decisions and the new rating and reports have been designed with this goal kept constantly in mind. The new ratings are now available in our products, including this web site. As always, we value your feedback, so please let us know what you think in the comments section below.

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  is director of fund research, Europe and Asia, Morningstar.

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