CHICAGO -- Seeking to make it easier for financial planners and investors to analyze the vast mutual fund universe, Morningstar announced Thursday that it would soon launch forward-looking, analyst-driven fund ratings.
The ratings -- which will range from Negative to AAA and be based on analysts’ projections about a fund’s ability to outperform its peer group or benchmark -- will be in addition to the investment research firm’s widely followed star ratings.
“We think of the star rating as an achievement test -- it documents what the fund has done. We think of these new analyst ratings as an aptitude test,” Don Phillips, president of fund research at Morningstar, said at the 23rd annual Morningstar Investment Conference.
“We don’t expect many funds to get the highest ratings,” Phillips said, adding that the advantage of Morningstar’s analysis is that “it’s completely independent.” That’s in contrast to equity research from Wall Street firms, which are often pursuing banking business with the companies they evaluate, or boutique research shops that are paid to write reports.
“If you’ve got a big fund that we think has negative characteristics around it, we’re not going to shy away from giving it a neutral or negative rating. There are a lot of funds that are pretty mediocre, like 401(k) funds that impact investors’ ability to save for the future,” he said.
The new initiative, covering funds worldwide, will begin this fall. The firm expects to cover 1,500 funds by next year. The new ratings will replace Morningstar’s analyst fund picks and pans.
Ratings of AAA will indicate a “best of breed fund,” while Negative indicates a fund with “at least one flaw that is likely to significantly hamper future performance.” ETFs will not be similarly rated; Morningstar said it eventually plans to include closed-end funds.
The new analyst fund ratings will be available for free. Analysis of the funds will be offered to paying subscribers.
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