Morningstar launches new funds rating scale in UK for Q4

Morningstar is implementing a unified ratings system for its qualitative forward-looking research, which will see funds rated ‘AAA’, ‘AA’, ‘A’, ‘Neutral’, or ‘Negative’.

The new system will be applied globally, to create a uniform approach to the qualitative fund research reports produced by Morningstar.

It does not replace the quantitative, backwards-looking star ratings, which look at risk-adjusted and cost-adjusted performance over three, five and 10-year periods.

The change to the comes after Morningstar’s acquisition of UK-based qualitative fund research business OBSR in early 2010. Since then the business has been working to create a unified ratings scale. Previously Morningstar’s qualitative ratings were ‘Elite’, ‘Superior’, ‘Standard’, ‘Inferior’, and ‘Impaired’, while those for OBSR were ‘AAA’, ‘AA’, and ‘A’.

The new ratings will be based on analysts’ convictions of a fund’s ability to outperform peers or benchmarks on a risk-adjusted basis over time.

Five “pillars” will be used to determine the final rating  – ‘AAA’, ‘AA’, ‘A’, ‘Neutral’ or ‘Negative’. These are: people, process, parent, performance and price.

A fund receiving any of the A-style ratings means that Morningstar’s analysts believe it will outperform peers or benchmarks on a risk-adjusted basis over a full market cycle of at least five years.

Don Phillips, president of fund research at Morningstar, said: “Morningstar has been providing independent, analyst-driven fund research for 25 years, but we’ve now codified the various evaluation methods used by our team of more than 90 analysts around the world to create one harmonised global rating system.”

“The rating is designed to supplement the fund due diligence process for investors and advisers and identify funds worth investing in over the long term. It is not designed to be a short-term market call on an asset class.”

“The new rating system better surfaces the work of our global research team and helps investors determine whether Morningstar analysts think a fund is worth considering. Analysts will assign positive ratings to funds they believe have enduring advantages and expect to outperform over the long term. Unlike many of our competitors, our ratings scale is unique because we’re not only identifying good funds, but mediocre and poor ones as well.”

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