Close Close

Portfolio > Mutual Funds

Morningstar Expands Quantitative Rating System via Machine Learning

Your article was successfully shared with the contacts you provided.

Morningstar is expanding its ratings system to thousands more funds through the launch of the Morningstar Quantitative Rating system.

The new ratings system essentially extends the reach of  Morningstar Analyst Ratings using machine learning.

Morningstar’s Analyst Ratings cover approximately 1,800 open-end mutual funds and ETFs. The Quantitative Rating is available for 10,000 funds representing more than 30,000 share classes in the U.S. Funds will have either rating but not both.

Like the Analyst Rating, the Quantitative Rating is a forward-looking assessment of a fund’s ability to outperform its peer group or benchmark on a risk-adjusted basis over a market cycle. It also uses the same labels as the Analyst Rating: gold, silver and bronze plus neutral and negative, based on the same Morningstar pillars: parent firm, people, performance, price and process.

(Related: Morningstar Finds Its Analyst Ratings Can Predict Future Performance)

“We’ve trained our machine-learning model to emulate how our analysts make decisions, greatly expanding fund coverage,” said Lee Davison, Morningstar’s head of quantitative research.

The machine-learning algorithm used in the Quantitative Rating is designed to take advantage of the wisdom-of-crowds effect. It can access the current and historical ratings decisions of Morningstar analysts and the data used to support those decisions such as expense ratios and past returns. The data is then run through the thousands of underlying models to ultimately come up with the final rating.

(Related:  How Advisors Really Use Morningstar Fund Ratings)

“Investors can use the Quantitative Rating, together with our other fund ratings to assess funds and improve their odds of success,” said Jeffrey Ptak, Morningstar’s global head of manager research, in a statement.

The ratings will be available beginning March 31 in Morningstar Essentials and the Morningstar Advisor Workstation. The firm will host a webinar on the new ratings on March 21 at 1 p.m. Central Time for those who want to learn more about the new system.