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By Jason Stipp | 09-02-2010 05:42 PM

A Better Look Under the Hood of Your Bond Fund

Our new average credit quality score better captures default trends among lower-rated bonds.

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Jason Stipp: I am Jason Stipp from Morningstar. Morningstar recently made some changes to how we calculate the average credit quality score on your bond mutual funds.

Here with me to talk about why the change was made and what the new score can tell you is John Rekenthaler. He's Morningstar's vice president of research.

John, thanks for joining me.

John Rekenthaler: Sure. Thanks, Jason.

Stipp: First question for you, average credit quality score, what is this data point? What does this data tell you about a bond fund?

Rekenthaler: The average credit quality score, we look at all the bonds that a fund owns, if it's a fixed income fund or a balanced fund, and each bond will typically have a credit rating -- one or more credit rating agencies will say this is AAA or AAA if it's Moody's, so it's BBB and so forth.

So we look at all those ratings and we try to roll that up and come up with an average score at a portfolio level, so that we can describe a fund and say, in aggregate this is a BBB quality fund or a A quality fund. It doesn't mean every security has that rating – generally speaking, every security is not that, but that's where it ends up at or that's what it would tend to behave as, that's the intent of the credit quality score.

Stipp: We have a new way of calculating that for now. But before we get to that, how was this calculated previously and what things went into that score as it used to be calculated?

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