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Morningstar's Phillips Talks to AdvisorOne About Launch of New Analyst Ratings for Funds

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Morningstar on Tuesday plans to launch in the United States its initial set of new global Analyst Ratings for funds and accompanying research as well as Global Fund Reports.

Don Phillips, managing director and president of fund research at Morningstar, told AdvisorOne on Monday that the Analyst Rating effort being launched by Morningstar in the U.S. is an effort to “harmonize” similar rating efforts that have been performed by Morningstar analysts for a couple years now in other areas of the world such as Australia and the United Kingdom.

While Morningstar has been producing independent, qualitative—or analyst-driven—written research on funds since the late 1980s, which lead Morningstar to create Analyst Picks and Pans in 1999, the new effort will assign ratings to all of the funds Morningstar “actively covers,” Phillips says. The initial ratings to be released Tuesday will cover more than 300 funds, Phillips told AdvisorOne, but the Chicago-based fund research company will eventually ramp up to cover 1,500 rated U.S. funds representing 80% of industry assets.

The new Analyst Ratings will be available in Morningstar Direct, Morningstar Office, and the fund research company’s U.S., European, and Asian investment research websites on Tuesday, while the new ratings will be incorporated into other platforms including Advisor Workstation and Principia later in the year.

Unlike Morningstar’s star rating system, which assigns one to five stars based on a fund’s past risk- and load-adjusted returns versus category peers, Phillips explains, the Analyst Rating is a “forward-looking, comprehensive look at a fund’s competitive advantages.”

The five-tiered Analyst Rating scale has three positive levels—Gold, Silver, and Bronze—in addition to Neutral and Negative ratings. Phillips says that Morningstar “reserves the top three tiers, expressed as medals, for funds our analyst team thinks have sustainable advantages that position them well versus peers and a relevant benchmark on a risk-adjusted basis over the long haul (of at least five years).”

Morningstar will focus on five key pillars in assigning the Analyst Rating: people, process, parent, price, and performance. Phillips says that ‘the ultimate view on the individual pillars and how they come together is driven by the analyst’s overall assessment” and overseen by an Analyst Ratings Committee, which is led by Russ Kinnel, Morningstar’s director of fund research.

But Phillips stresses, these analyst “ratings are what we see as the strengths and weaknesses of the funds; we are not making a buy or sell recommendation.”

For advisors, the ratings can “supplement their due diligence process,” Phillips continues, and allow Morningstar “to put more information we have about a fund in front of advisors.”

As part of the Analyst Rating initiative, Morningstar has also developed a new Global Fund Report—which is a comprehensive seven-page report on a given fund, featuring new data, graphics, and editorial commentary.


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