Morningstar to Enhance Forward-Looking Fund Ratings

July 8, 2019

CHICAGO, July 8, 2019 /PRNewswire/ -- Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment research, today announced it will enhance two of its forward-looking fund ratings systems, the Morningstar Analyst Rating™ for funds (Analyst Rating) and the Morningstar Quantitative Rating™ for funds (Quantitative Rating). The enhanced ratings, which are based on an updated assessment framework, will begin to take effect on Oct. 31, 2019.

The Analyst Rating is Morningstar's forward-looking, analyst-driven ratings system that takes the form of Gold, Silver, Bronze, Neutral, and Negative. While the overall ratings scale and where to access them remains unchanged, Morningstar will change the underlying methodology analysts follow, setting a higher bar for funds to earn a Gold, Silver, or Bronze rating and also doubling down on fees. The Analyst Ratings will also be tailored to individual fund share classes, taking fee differences into account. Morningstar will make accompanying updates to the Quantitative Rating, a companion forward-looking system that uses machine-learning techniques to assign ratings to funds not covered by a Morningstar analyst. Those updates will ensure the Quantitative Rating continues to strongly align with the Analyst Rating.

"We've been encouraged by the way investors have incorporated the Analyst Ratings and Quantitative Ratings into the research they conduct. We're building on that acceptance and making the ratings more effective and useful to investors," said Jeffrey Ptak, Morningstar's head of global manager research. "Additionally, the enhanced framework sets a higher bar for strategies to earn a Gold, Silver, or Bronze rating, and we are placing a greater emphasis on the importance of fees."

The enhancements include:

Simpler framework: The existing assessment framework revolves around five elements, or "pillars", including People, Process, Parent, Performance, and Price. Under the new framework, analysts will assess three of these pillars, People, Process, and Parent. The analysts will use that assessment to estimate how much value a strategy can add before fees. Performance and Price will cease to be standalone pillars, as analysts will incorporate their performance assessment into the other pillars and express price differently.
Greater emphasis on fees: Currently, a strategy's fee rank within its peer group drives its Price pillar rating, which feeds into the overall Analyst Rating. Under the new methodology, analysts will deduct a strategy's expenses from their estimate of how much value it can add before fees, with that estimate based in part on the people, process, and parent pillar assessments they conduct. This approach has the benefit of evaluating costs relative to what a fund can deliver before fees, yielding a sense of what value investors will net after fees are taken into account, which is what ultimately matters. It also puts the fee assessment on the same plane as the analysts' research into the other three pillars, ensuring prices gets the weight it deserves.
Higher bar for active strategies: Analysts will limit Medalist ratings—Gold, Silver, and Bronze—to active strategies that can surpass a relevant benchmark and peer group average net of fees and after accounting for risk. In the past they might have awarded these ratings to active strategies that could beat their average peer or an index, but not both.
Clearer roadmap for investors: Analysts will assign fewer Medalist ratings to active strategies in areas where analysis finds there's less payoff to active investing. That payoff estimate will shape the expectations they form for the success of active investing and indexing in different areas.
Tailored to share classes: Today, analysts evaluate a single representative fund share class and then apply that rating to all other share classes. In the future, they'll evaluate each share class on its own by taking fee differences into account. This could mean share classes that bundle advice and sales fees may see ratings downgrades.
Refined pillar ratings: The scale that analysts use to rate People, Process and Parent will be refined. Today, analysts rate these pillars using "positive", "neutral", and "negative"; when the enhanced ratings take effect, analysts will assign pillar ratings on a "high", "above-average", "average", "below average", and "low" scale.

The ratings enhancements will begin to take effect on Oct. 31, 2019. Morningstar will launch an initial set of Analyst Ratings assigned under the new methodology on that date, with the remainder to be updated gradually over the subsequent twelve months. The Morningstar Quantitative Ratings will be updated in full on Oct. 31, 2019. The updated methodology is available here, and the current methodology is available here: Morningstar's Signature Research & Methodology.

For additional information on the ratings enhancement, visit Morningstar.com. An infographic about Morningstar's fund ratings and how they can be used by investors to assess funds is available here.

Morningstar continually evaluates its rating systems and is evolving to align with investors' needs and empower their success. Recently, Morningstar also introduced a forthcoming methodology change to the Morningstar Sustainability Rating™, enabling investors to make more informed investment decisions by rating the absolute ESG risk of investor portfolios. More detail is available on the Morningstar Blog.

The Analyst Rating, Quantitative Rating, and Sustainability Rating for funds are available to Premium members of Morningstar.com. Morningstar's Global Fund Reports, in-depth research reports that include a wealth of data and analysis are available in Morningstar Direct^℠, the company's web-based global investment analysis platform for institutional investors, and in Morningstar Office^℠, a global practice and portfolio management solution for advisors.

Morningstar Analyst Rating™ for funds
Launched in 2011, the Morningstar Analyst Rating for funds is the summary expression of Morningstar's forward-looking analysis of a fund. Analyst Ratings are assigned globally on a five-tier scale running from Gold to Negative. The top three ratings, Gold, Silver, and Bronze, all indicate that our analysts think highly of a fund; the difference between them corresponds to differences in the level of analyst conviction in a fund's ability to outperform its benchmark and peers through time, within the context of the level of risk taken. The Analyst Rating does not express a view on a given asset class or peer group; rather, it seeks to evaluate each fund within the context of its objective, an appropriate benchmark, and peer group.

Morningstar Quantitative Rating™ for funds
To expand the number of funds that Morningstar analysts cover, Morningstar developed the Morningstar Quantitative Rating in 2017, which uses a machine-learning model to emulate the decision-making processes of Morningstar analysts, their past ratings decisions, and the data used to support those decisions. The machine-learning model is then applied to the "uncovered" fund universe and creates the Quantitative Rating, which is analogous to the rating an analyst might assign to the fund if an analyst covered the fund. With this quantitative approach, Morningstar can rate nearly 6 times more funds in the global market.

About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and institutional investors in the private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $210 billion in assets under advisement and management as of March 31, 2019. The company has operations in 27 countries. For more information, visit www.morningstar.com/company. Follow Morningstar on Twitter @MorningstarInc.

Morningstar's Manager Research Group consists of various wholly owned subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC. Analyst Ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst Ratings are based on Morningstar's Manager Research Group's current expectations about future events and therefore involve unknown risks and uncertainties that may cause such expectations not to occur or to differ significantly from what was expected. Analyst Ratings are not guarantees nor should they be viewed as an assessment of a fund's or a fund's or separately managed account's underlying securities' creditworthiness. This press release is for informational purposes only; references to securities or a separately managed account investment strategy in this press release should not be considered an offer or solicitation to buy or sell the securities or to invest in accordance with that strategy.

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