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Morningstar's Approach to Mutual Fund Analysis

We've changed when we update funds, not how.

Karen Dolan, 12/06/2010

Have an opinion? Express it ibn the comments section at the end of the article!

If you're a regular reader of Morningstar's fund analysis, we think you will like the changes we've made to the frequency and timing of our updates. In the past, we updated a fund's analysis on a six-month schedule based on its category. At times, that schedule took precedence over new information that was available or notable developments in fund performance or the portfolio.

But we've moved to a more flexible system reliant on our analysts' judgment and now provide fund updates when it matters most for you. For example, we analyze news that impacts your investment such as a manager change, a big shift in portfolio, uncharacteristic swings in performance, or money flowing too quickly in or out. We'll let you know what to make of a fund merger or substantive changes at the fund family.

Beyond tying our updates more closely to the data underlying your investments, we also improved our update frequency. Expect several updates each year on the most widely owned funds and our Analyst Picks--the funds that you've told us matter most to you. We'll also continue to give you a heads-up on the best new funds and follow talented managers who have left one fund company and joined another. All other funds on our coverage list will be updated at least once annually.

The frequency and timing of our updates is changing, but our approach is not. Here's how we approach fund analysis.

First, a Priority Check
"Investors First" is one of Morningstar's five core values, and it is of utmost importance to our team of mutual fund analysts. This is reflected in the priorities we bring to our fund analysis. We are independent thinkers and put individual investors' interests first. We let investors know whether a particular fund is worth owning and why. We base that judgment on rigorous fundamental analysis, not simply recent past performance. We do our best to keep investors up to date on changes affecting their funds. And we keep a long-term time horizon.

These goals are top of mind as we analyze the nearly 2,000 funds on our coverage list. Our research combines qualitative and quantitative factors. We don't just screen funds and base our recommendations solely on easy-to-measure, backward-looking figures. To get at the heart of what makes a fund a good or bad investment, our process incorporates a variety of information including regular interviews with fund managers and on-site fund company visits, as well as comprehensive reviews of a fund's strategy, fees, portfolio positioning, and risk profile. We also look at a fund's record, but in detail, evaluating how it performed in various market conditions and considering if it had different managers or strategies in different periods. That's a lot, but it can all be grouped under the following five pillars:

People: How good are the fund's managers and analysts?
When purchasing a mutual fund, you are hiring a management team to pick securities for you. That's why we pay close attention to the people contributing to the research process and spend time getting to know the manager who is making the calls. We also key in on everyone integral to the process, from the research staff to the firm's chief executive and chief investment officers. This background helps us spot potential weaknesses and determine whether a manager's departure is a deal breaker for shareholders.

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