Morningstar launches passive fund ratings – UK first, Continent next

Morningstar has launched qualitative research and ratings for passive funds covering the 25 most popular index funds in the UK, but is expected to continue rating more passive funds across this and other markets in Europe.

The rated funds include 23 funds that are ‘Morningstar Medalists’, which are funds that receive a Morningstar Analyst rating of Gold, Silver or Bronze. Of the 23, some nine are rated Silver, and 14 Bronze, although none are rated Gold, while two are rated Neutral.

The ratings uses research implementing Morningstar’s methodology, which looks to five areas: people, the investment process, the parent group, performance, and fees.

Additionally, passive funds are scrutinised for their benchmark tracking accuracy.

Jose Garcia Zarate, senior passive fund analyst (pictured) at Morningstar, said that the decision to start the analysis with a batch of funds in the UK reflected the investor base for tracker funds in the country.

However, as Morningstar is pan-European in scope it is planning to extend the coverage of trackers to other markets, such as Switzerland, where there is also a significant investor base.

“We will consider that in future, and will follow the same methodology we have followed to rate the UK funds,” Zarate said.

The benefit to investors of doing such research is that it helps answer the question as to whether any particular fund is a good investment proposition compared to alternatives in the same category.

“The analyst rating is a qualitative rating, so it is an analyst opinion on whether any particular fund will outperform its peers over a market cycle. What we found is that by and large of all the 25 funds we have rated in this first wave of ratings, a majority of them do come up as likely or within likelihood of outperforming peers in their respective categories.”

“The degree of conviction is reflected in whether we have given a Silver, Bronze or Gold. That is a way of grading the conviction we have.”

Zarate said that the results from the research produced results that were generally expected. The passively managed funds benefit from the lower charges they offer investors, although it is too soon to talk about trends noted from the research into relative benefits against actively managed funds – because the results only cover an initial batch. Further research is ongoing, and the results will be published next year at some point.

“It is supposed to be vehicle neutral in a way. We’re not saying passive is good and active is bad. We’re trying to pinpoint for investors what we think are the best possible investment vehicles out there,” Zarate said.


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