With changes to its analyst rating methodology starting Oct. 31, Morningstar wanted to clarify how many mutual funds and ETFs it follows actually would be affected — for good or bad. Running funds through the new methodology, and comparing these to the existing rating system, Morningstar determined a rough loser/winner percentage.
Bear in mind the new system includes fees charged by the fund or ETF in its calculation. Right off the bat, funds with a higher fee structure would be downgraded.
The change will directly deduct a strategy’s expenses from the analysts’ estimate of its potential value-add before fees, which will “see what the strategy will give before fees,” said Jeffrey Ptak, global director manager research, in an earlier conference call. One reason is to make the system more “relevant to key decisions,” that is, to stay with active or go passive, he added.