A breakdown of the CEF team's analyst ratings by firm, analyst, and Morningstar classification.
With the London Olympics winding down, the ubiquitous "medal count" is tallied everywhere. For two weeks, we are bombarded with charts and graphics telling us which country has won the most medals overall, and most importantly, who's leading the gold medal race. In recent years, this has become a competition between the United States and China with most other nations falling vastly behind. So far this year, Great Britain has made a great third-place showing with (as of this writing) 48 total medals, 22 of them gold. This pales in comparison to China's 73 total medals, 34 of them gold, and the United States' 71 overall medals, 30 of them gold.
While the closed-end fund, or CEF, team has been enjoying the 2012 race for gold, we look for gold year round. In the fall of last year, Morningstar launched its new qualitative Morningstar Analyst Rating for Funds (you can read a methodology document here). Since the launch, we have been rolling out coverage and ratings of CEFs and have launched 106 full reports and ratings to date. We thought this would be an opportune time to take stock of our own "medal count." We grouped the ratings by the funds' Parent or Advisor, by Morningstar Classification, and by analyst.
Morningstar's Analyst Rating for Funds
Let's start with a quick review of Morningstar's Analyst Rating for Funds. The rating is qualitative and separate from the Morningstar Rating for Funds (the "Star Rating"). It is based on Morningstar's conviction in a fund's ability to outperform its peer group or relevant benchmark on a risk-adjusted basis. The rating is built around five pillars that we believe inform future performance: People, Parent, Process, Performance, and Fees. (For CEFs, our reports also discuss some CEF-specific issues such as discount and premium, distribution, board of directors, and leverage.) Unlike the Star Rating, which relies solely on historical risk-adjusted performance against a peer group, the Analyst Rating is qualitative and forward-looking. Historical performance plays a minimal role in the rating, with the focus on the fund's managers, the investment process, and the parent firm. There are three positive ratings (Gold, Silver, and Bronze), a Neutral rating, and a Negative rating. The degree of conviction decides which positive rating a fund may get, but the ratings are not designed to predict that a Gold-rated fund will outperform a Silver- or Bronze-rated fund.
Analyst Ratings on CEFs are provided for funds based on net asset value. We attempt to cover the largest funds and any sister funds managed by the same team and utilizing similar processes. In all, we have 106 funds rated with plans to reach about 150 by the end of 2012. While this doesn't seem like many funds (there are about 620 CEFs in existence), many are small and thinly traded. The funds currently covered represent about 55% of the total net assets of all CEFs.
CEF Medal Count
Note that all of the ratings listed in the tables below are as of July 31, 2012. Table 1 shows the total medal count for our entire CEF coverage list. Most of our ratings fall in the Bronze and Neutral category, which is to be expected.
The five Gold funds fall into categories all over the map (see Table 4 for the Morningstar Classification breakdown of medals) and represent only 5% of all rated CEFs. The Gold-rated funds are Aberdeen Asia-Pacific Income FAX, Alliance Bernstein Income ACG, CBRE Clarion Global Real Estate Income IGR, Gabelli Equity GAB, and Royce Value Trust RVT. For a fund to earn a Gold rating, it must have a strong parent (one that is shareholder-friendly and transparent and has a long and stable history), a cohesive management team with extensive experience investing in the asset class, impressive risk-adjusted historical performance, relatively low fees, and a well-articulated and well-executed investment process.
Table 2 lists each rating as a percentage of total rated funds by the team's three analysts. We see a similar distribution of ratings in the breakdown by analyst as appears in the total percentage of ratings. (Mike's list is the exception, but, being the boss, his coverage list is the smallest on the team.)