Toronto-based Morningstar Research Inc. Tuesday introduced forward-looking, analyst-driven global fund ratings for approximately 150 Canadian funds.
The Morningstar analyst rating for funds supplements the Morningstar rating for funds, commonly known as the “star rating,” which assigns one to five stars based on a fund’s past risk and return versus category peers.
The new five-tiered analyst rating scale has three positive levels — gold, silver, and bronze — in addition to neutral and negative ratings. Analysts arrive at a rating through an evaluation of five key pillars they believe are crucial to predicting the future success of a fund, considering both numeric as well as qualitative factors: people, process, parent, performance, and price. Morningstar analysts score these five pillars as positive, neutral, or negative, which are then combined for the overall rating.
The analyst ratings are not designed to be a market call on an asset class or a prediction of short-term performance, Morningstar says, and cannot assess whether a fund is the right fit for an investor’s particular portfolio or risk tolerance.
Morningstar reserves the top three tiers, expressed as medals, for funds its analyst team thinks have sustainable advantages that position them well versus peers and/or a relevant benchmark on a risk-adjusted basis over a full market cycle of at least five years.
The analyst ratings replace Morningstar’s “fund analyst picks”, a proprietary list of the most-favorite funds chosen by the firm’s analysts in each investment category.
“The Morningstar analyst rating is an important evolution of our fund research. While the rating system is new, our analysts have been producing independent research on funds since the late 1980s,” says Don Phillips, president of fund research for Chicago-based Morningstar Inc., the parent company of Morningstar Research Inc.
“Our quantitative star rating for funds is a backward-looking achievement test, while the new analyst rating is more of an aptitude test, signaling to investors our forward-looking perspective on a fund’s ability to be a strong investment option over the long haul.”
The new ratings are now available on Morningstar’s website. The ratings will be available in PALtrak, the firm’s mutual fund analysis software.
Morningstar Canada will also be publishing updated stewardship grades for 2011, designed to help investors identify and compare fund companies on how they align their interests with those of fund unitholders. Stewardship grades have been updated for 26 Canadian fund companies. Of the 26 firms graded, Morningstar identified four companies as industry leaders in terms of stewardship with an A grade, while no fund firms received an F.
Morningstar Canada also announced that global fund reports for funds available for sale in Canada will be available in early 2012.