Investments  

Morningstar to overhaul fund ratings

Morningstar to overhaul fund ratings

Morningstar is to update the framework for its gold, silver and bronze fund ratings. 

Under the new framework, which will be introduced at the end of October, analysts will no longer focus on performance and price, which formed two of the five pillars used previously, and will only assess people, process and parent. 

According to Morningstar, this will allow analysts to estimate how much value a strategy can add before fees. 

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While performance and price will no longer be a point of focus individually, Morningstar has said that fees will be an additional element, meaning they will feature more prominently. 

It stated: "Currently, a strategy's fee rank within its peer group drives its price pillar rating, which feeds into the overall analyst rating. 

"Under the new methodology, analysts will deduct a strategy's expenses from their estimate of how much value it can add before fees, with that estimate based in part on the people, process, and parent pillar assessments they conduct."

The gold, silver, and bronze ratings will be limited to active strategies that can surpass a relevant benchmark and peer group average net of fees and after accounting for risk, Morningstar confirmed. 

As part of the shake-up, the analyst ratings will also be tailored to individual fund share classes, taking fee differences into account. 

Currently analysts evaluate a single representative fund share class and then apply that rating to all other share classes.

In the future, they'll evaluate each share class on its own by taking fee differences into account. This could mean share classes that bundle advice and sales fees may see rating downgrades. 

Jeffrey Ptak, Morningstar's head of global manager research, said: "We've been encouraged by the way investors have incorporated the analyst ratings and quantitative ratings into the research they conduct. We're building on that acceptance and making the ratings more effective and useful to investors.

"Additionally, the enhanced framework sets a higher bar for strategies to earn a Gold, Silver, or Bronze rating, and we are placing a greater emphasis on the importance of fees."

Morningstar will launch an initial set of analyst ratings assigned under the new methodology in October.

The remainder will be updated gradually over the subsequent 12 months. 

Adrian Lowcock, head of personal investing at Willis Owen, said: "It is clear these enhancements are taking into account the impact of charges.

"By having a different rating on funds with different charges investors will be able to judge more clearly the impact of charges on the added value a fund manager and their strategy offers.

"The simplification of the process and incorporation of performance into the other three pillars makes sense – as the other elements can only be effectively judged by referencing performance."