Morningstar (NASDAQ: MORN), a leading provider of independent investment research, today announced an ambitious plan to provide investor-centric, analyst-driven qualitative research and ratings for European and Asian funds.
The new ratings and accompanying analyst research reports complement the well-known, quantitative Morningstar Rating for funds (often referred to as its "star rating") to help provide investors and their advisers with a highly valuable tool to compare, screen, and research funds. Morningstar aims to rate and report on 3,000 funds in Europe and Asia, which would increase the total number of funds worldwide for which the company provides written analyses to more than 5,000. In addition, Morningstar tracks performance and operational data on approximately 110,000 funds globally.
The new ratings and research offer forward-looking insight and assumptions into how a fund might behave under different market conditions and are based upon fundamental criteria such as expenses, manager experience, and investment approach. Morningstar does not charge fund groups to be rated, nor can they commission research, providing investors and their advisers with truly independent, objective information. The decision to report on a fund is driven by investor interest and analyst discretion.
"Given the global financial climate, the need for investors and their advisers to have access to objective, unbiased research borne of a completely transparent process has never been greater," said Christopher Traulsen, CFA, director of research for Morningstar Europe and Asia. "When others are cutting back their research, we're ramping up our efforts, because we want to elevate the debate beyond 'good fund/bad fund' and help investors maintain realistic performance expectations and manage their portfolios more wisely."
The new Morningstar Qualitative Rating for funds will be issued as one of five ratings-Elite, Superior, Standard, Inferior, or Impaired-based on the analyst's conviction in the fund's ability to outperform its peer group over the long term. The ratings scale is unique from other firms because analysts not only identify good funds, but mediocre and poor ones as well. Investors will be able to screen and filter their fund choices using the qualitative ratings.
Along with the qualitative rating, Morningstar will issue a detailed Morningstar® Fund Research Report, which contains the rationale behind the qualitative rating, the analysts' thoughts on the fund manager and team, an overview of the fund's investment process and portfolio positioning, an examination of the fund company and incentive structure, and an evaluation of the fund's performance and expense structure. These qualities are examined within the context of Morningstar's "Five Pillars" of fund research-People, Parent, Process, Performance, and Price:
• People: An assessment of the quality of a fund's managerial team, based on factors like experience, skills, temperament, workload, analytical support, and incentive structure.
• Parent: An evaluation of quality of the investment firm, which considers ownership structure, compensation schemes, managerial stability, and firm culture that emphasises the investment process over profits
• Process: A review of overarching investment strategy and its execution-both in terms of security selection as well as portfolio construction. Analysts assess risks inherent to the strategy, looking not just at backward-looking measures of risk but forward-looking ones such as stock, sector, and geographic exposures, as well as valuation risk and asset size.
• Performance: Morningstar takes a holistic view of performance analysis, in the context of the fund's investment objectives and drivers of performance. Analysts focus on performance over a full investment cycle to gain insight about how a fund might perform in the future under a variety of market environments.
• Price: Morningstar research has established a strong relationship between fund expenses and future performance. Consequently, a fund's total expense ratio (TER) can have a significant impact on the analyst's opinion.
Each section is supported by detailed analytics, operational data, and performance illustrations. When selecting funds to cover, Morningstar's analysts consider asset size-particularly those funds with the greatest interest from retail investors-investment merit, and market demand. Because future outperformers are not necessarily the same as in the past, Morningstar does not limit coverage to funds meeting certain performance criteria or track record history. Further, Morningstar has a network of 28 fund analysts located in markets across Europe and Asia, who work closely with the company's global analyst teams in the United States, Canada, and Australia. Morningstar believes that local experts, who know their markets and can conduct interviews and write reports in their local languages, best serve investor needs.
Morningstar clients will be able to access the new ratings and research through Morningstar® Adviser WorkstationSM; Morningstar DirectSM, its flagship institutional platform; Morningstar Workstation, and across its various retail Web sites.
"Our goal is to help investors better determine a fund's overall investment merit, and select the funds capable of outperformance that best fit into a portfolio," Traulsen said. "The new qualitative ratings help advisers to better focus their research on the most promising funds, while the fund research reports are designed to help investors better understand the inner workings of each fund, to help them select the right funds for their individual needs and risk profile."