Morningstar expects to begin rating mutual fund companies, in addition to the funds themselves, by the end of this year.

Morningstar plans to rate the largest mutual fund companies using qualitative as well as quantitative data, said John Rekenthaler, director of research for the fund rating company in Chicago.

Factors used to develop the ratings could include the quality of a firm's research team, the ability of fund companies to replace departing portfolio managers with effective successors and the overall quality of a firm's funds, Rekenthaler said.

The ratings are in the very early stages of development, Rekenthaler said. Morningstar has not decided whether it will use its popular star system or some alternative to rate fund companies, he said. Morningstar expects the system to be limited to perhaps the 50 largest fund companies. The ratings will concentrate on the companies' money management effectiveness and will not assess a fund company's financial strength, Rekenthaler said.

Morningstar's ratings have become key factors in the ability of funds to generate sales. Funds which carried a four- or five-star Morningstar rating at the end of 1997 accounted for 72 percent of fund sales in 1998, according to Financial Research Corp. of Boston. (MFMN 2/15/99)

A Morningstar rating system for fund companies could prompt mutual fund executives to merge or liquidate quickly funds with poor performance, said Geoffrey Bobroff, a mutual fund company consultant in East Greenwich, R.I. Fund companies will have an incentive to eliminate lagging funds because those funds' records could hurt a company's overall rating, Bobroff said. Bobroff also questioned the value of qualitative ratings of fund companies, saying the factors which go into such an assessment could be too subjective to be reliable.

But, Rekenthaler believes the fund company ratings ultimately may be more valuable than individual fund ratings. The company ratings will provide "a more consistent signal than the stars do" for investors assessing performance, Rekenthaler said.

The fund company ratings could provide investors with "a tiebreaker" to use when trying to chose among competing funds with similar performance, he said.

Since what Morningstar will be offering is ill-defined, it is unclear whether it will be an industry first.

Standard & Poor's offers profiles of fund companies, said Phil Edwards, a managing director of Standard & Poor's of New York. The profiles run approximately 10 pages and do not offer a rating or grade of the companies' investment capabilities, Edwards said. Thus far, Standard & Poor's has written profiles on approximately 50 offshore fund companies. It expects to introduce its first profile of a domestic company in the next month, he said.

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