Morningstar Introduces Analyst Rating for Mutual Funds

One of the earliest articles I wrote about investing in mutual funds was how to understand Morningstar Star Rating system and use it to research mutual funds.  It has been a while since that article was written and I haven’t added any new fund to my taxable investment accounts for years, so I haven’t used it for quite some time as you can see. However, I still consider the Star Rating a valuable tool when evaluating funds because it gives me a quick idea of how a fund has performed, in the past of course, which also makes the Star Rating kind of backward-looking. Even though we all know that, for mutual funds, past performance doesn’t guarantee future return, a good tracking record is still meaningful to some extent.

While the Star Rating is  helpful in the mutual fund research process, its heavy reliance a fund’s past performance also presents a problem for potential investor. When we buy a mutual fund, what we care about is how it will perform in our portfolio going forward, not really its history. But a fund that is rated five stars will no doubt gives one the impression that it’s superior than funds that have only four star rating, especially if he or she doesn’t know what exactly the star rating means and how it is derived by fund analysts. For anybody who’s new to mutual fund investing, the Morningstar Star Rating system could be confusing and even misleading.

So to correct this “problem”, Morningstar has recently launched a new Analyst Rating system to help mutual fund investors understand better a fund’s past performance as well as future prospect. The Star Rating itself is the same as it was before. What has been added to the overall rating of a fund is an all new Awards system that designates a fund as Gold, Silver, Bronze, Neutral, or Negative based on Morningstar fund analysts’ opinion on the fund’s future. The Gold, Silver, and Bronze present a positive forward-looking view of the fund, while Neutral or Negative means the fund is unlikely to stand out from its peers.

Morningstar Star Rating Review

The new rating system not only looks into the fund’s the past performance, as the Star Rating does, but also examines how much the fund charges investors for owning the fund, the managers who run the fund, the company that owns the fund, and how the the investments in the fund are selected. According to Morningstar, the analyst rating is

a forward-looking, comprehensive and qualitative look at a fund’s competitive advantages or lack thereof. The new scale runs from Gold, Silver, and Bronze on the positive end to Neutral and Negative. Expressed as medals, the top three tiers are reserved for funds our analyst team thinks have sustainable advantages that position them well versus peers and a relevant benchmark on a risk-adjusted basis over the long haul (at least the next five years).

As you can see from the above screenshot, the new medal is prominently displayed alongside the Star Rating on Morningstar’s fund page. Now with the Star Rating representing the past and the Analyst Rating indicating the future, probably you can have a better idea of a fund when you go to Morningstar for your mutual fund research :)

This article was originally written or modified on . If you enjoyed reading this post, please consider subscribing to my full RSS feed. Or you can also choose to have free daily updates delivered right to your inbox.


Author Info

This post was written by Sun You can find out more about Sun and his activities on Facebook , or follow him on Twitter .

3 Responses to “Morningstar Introduces Analyst Rating for Mutual Funds”

  1. flats at manapakkam |  Jan 20, 2012 at 7:36 am

    I am really glad that I have found this post and I thank you for letting us know about this information….This is a big help for sure!!Thanks!!

  2. Anthony DuBon |  Jan 25, 2012 at 7:59 am

    How much does the new system really help? The problem is that we don’t know. The effectiveness of the new forward looking service can only be judged after it has been running for a while. There will be indications in a year, more valid information will be available in two years. That is reflected in the “PROBABLY” qualification in the quote below.

    “Now with the Star Rating representing the past and the Analyst Rating indicating the future, PROBABLY (commenter’s emphasis) you can have a better idea of a fund when you go to Morningstar for your mutual fund research.”

    There is an approach that has demonstrated capability to predict mutual fund results. See the proof at http://www.fundreveal.com. Fundreveal outperformed the S&P 500 by 83% between 2000 and 2010.

  3. Wall Street Ranter |  Jan 26, 2012 at 3:35 am

    I did a breakdown on their first batch of ratings here

    1st batch is extremely positively biased. They say the top three tiers are reserved for funds their analyst team thinks have sustainable advantages that position them well versus peers AND A RELEVANT BENCHMARK on a risk-adjusted basis over the long haul. It is impossible for an index fund to have a sustainable advantage over the index it is tracking….yet they have many Gold rated index funds. By their own definition a cheap index fund should be given the NEUTRAL rating.

    reality is only a VERY select group should receive “metal” ratings at all. The rest should be neutral and negative.