Morningstar plans to introduce a new mutual fund rating system that awards high marks to asset managers that demonstrate good corporate governance tactics, The Wall Street Journal reports.
Morningstar ate a significant amount of crow for highly touting mutual funds that were later implicated in the market-timing and late-trading scandals. The forthcoming system is a way around performance-based reporting that fails to take into consideration steps taken by asset managers to uphold shareholders' interests.
In addition, Morningstar aims to alert investors when funds are overweighted in narrow market sectors. In the past, some top-performing funds, such as technology funds, won top star ratings without employing enough diversification to avoid quick downturns caused by abrupt market fluctuations. Morningstar also notes that its star rating system failed to take into account excessive fees found in some top-rated funds.
Most of the changes were mentioned by executives after the company announced its plans to go public. The new governance system, which is slated for release in the summer, uses a rating system of A through F to rank funds, with A as the highest possible score. The system incorporates variables including board independence, corporate culture, fund manager compensation. This system is completely separate from its coveted star rating system.