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June 09, 2011 at 11:24 AM
Don Phillips, Morningstar’s president of research, announced a new “forward-looking” analyst rating system at the company’s annual advisor conference on Thursday.
According to Phillips, the new system will be based on analysts’ convictions about a fund’s ability to outperform its peer group and relevant benchmarks on a risk-adjusted basis. The company plans to launch the new ratings and research reports in the fourth quarter.
"While the star system has traditionally been a grade that the fund and the manager receive based on past performance, the new system will be more of more of an ‘aptitude test,’ and based on how the analyst perceives any investments, news or management changes will affect performance,” Phillips said. “The new ratings will not replace the star ratings, and the existing star methodology will not change.”
Morningstar will not charge fund firms to be rated, and its decision to rate and report on a specific fund is made solely by the analyst team based on factors such as investor interest and asset size. In the United States, the new ratings and research reports will replace the company’s “Analyst Picks and Pans.”
The new ratings will be assigned as follows—AAA, AA, A, Neutral, or Negative. According to Phillips, analysts will arrive at a rating through an evaluation of five key “pillars” Morningstar believes are crucial to predicting the future success of a fund: people, process, parent, performance and price. If a fund receives a positive rating of AAA, AA, or A, it means Morningstar analysts think highly of the fund and expect it to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over a full market cycle of at least five years.
