FAQ: Morningstar Analyst Rating and Global Fund Report

The most common questions we get about the Morningstar Analyst Rating and our Global Fund Reports

David O'Leary 21 November, 2012 | 10:00AM

On November 21 we launched analyst driven unit trust research for South African unit trusts. While Morningstar has been conducting fund research since 1986 this marks our first foray into Africa. The launch introduces two ground-breaking tools to help South African fund investors and advisors: The Morningstar Analyst Rating and Fund Report. Both tools are designed to convey Morningstar’s expectations for a unit trust’s ability to produce future outperformance. 

For more information see our Analyst Rating methodology document and a sample fund report. Below are answers to questions we frequently receive:

What is the Morningstar Analyst Rating?

Morningstar's Analyst Ratings are qualitative, forward-looking visual representations of the analyst team's view of a fund's potential to succeed. See our Fact Sheet for more info. 

What is the Morningstar Fund Report? 

The Morningstar Fund Report details the research our analysts have conducted and discusses the factors that have led to the fund’s Morningstar Analyst Rating. The Fund Report also provides robust quantitative data to help investors understand a fund’s characteristics. We offer a condensed version available for free on our public website and a seven page long form fund report for institutions and advisors. 

Where can I find the Morningstar Analyst Rating and Fund Report?

The Morningstar Analyst Rating can be found on the first page of each Fund Report. In addition, the ratings and reports can be found in Morningstar Direct, Morningstar Advisor Workstation (selectively available), and www.morningstarsa.co.za (a condensed version of the full Fund Report).

How does Morningstar arrive at a fund’s Analyst Rating?

Morningstar’s evaluation of a fund is based on five key criteria or “pillars”: People, Process, Parent, Performance, and Price. A detailed explanation of these criteria can be found in the Morningstar Analyst Rating methodology document. Fund analysts use a combination of public data, proprietary data, and extensive meetings with fund managers and fund company executives to inform their research. All ratings are subject to a rigorous peer review process and require approval through Morningstar’s global ratings committee.

How often are the ratings and reports updated?

Morningstar rated funds are monitored constantly and our reports and ratings are updated anytime a significant development occurs that may change our thesis (e.g. a change of fund manager). However, we do strive to update reports periodically whether or not any significant developments occur.

I invest in a fund that isn’t rated, should I sell it?

Not necessarily. There are too many funds out there for us to cover them all. As a result, there are many quality funds that we do not rate.

How does Morningstar select the funds it decides to cover?

We base our coverage on where investors put their assets while leaving 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. And we'll cover small funds and/or new funds if we think there is investor interest or the fund looks like one we might potentially recommend.

Will I earn a better return if I invest in funds rated Gold, Silver, or Bronze (Morningstar Medallists)?

While we strive to direct investors toward quality funds, we cannot make any performance guarantees. Furthermore, we aim to recommend funds that will provide a better overall investor experience; not necessarily the highest total return. Other factors that can affect an investor’s overall experience include issues such as risk, volatility, fees that are not included in the TER, and tax efficiency.

The fund I own is rated Neutral or Negative, should I sell it?

Not necessarily. There are many factors an investor should consider before making the decision to buy or sell a fund. There may be transaction costs or tax consequences associated with liquidating a fund. We highly recommend investors discuss their buy/sell decisions with a certified financial advisor.

Should I expect a fund rated Gold to perform better than a fund rated Bronze or Silver?

Not necessarily. The distinction between the medal positions represents differences in the level of our analysts’ conviction in that fund’s ability to achieve its stated objective. For example, we may assign a Gold rating to a conservative domestic equity fund and a Bronze rating to a far more aggressive domestic equity offering. Should both funds achieve their objectives, all else equal, the more aggressive Bronze-rated fund – which we have less conviction in – would likely outperform the more conservative Gold-rated fund.

What’s the difference between the Star Rating and the Analyst Rating?

The Morningstar Rating is a purely quantitative, backward-looking, measure that grades how well a fund has performed on a risk adjusted basis compared to its peers. Think of it like a report card on a fund’s past performance. The Morningstar Analyst Rating is a forward looking visual representation of our analysts’ conviction in a fund’s ability to succeed in the future.

Are ratings assigned according to a specific distribution (e.g. a bell curve)?

No. We do not force ratings to fit a specified distribution. However, we have found that the distribution of our ratings typically has a positive skew. This can partially be explained by the fact we’re constantly searching for funds to add to our coverage list that we might potentially recommend to investors. Also, our focus on covering the largest funds does unintentionally filter out the smallest, and sometimes, inferior fund offerings.


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David O'Leary