Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jason Stipp | 11-14-2011 12:00 AM

How to Use Our New Analyst Rating for Funds

Director of fund analysis Karen Dolan explains Morningstar's new forward-looking ratings and how investors can use them to find the top funds for their portfolios.

Jason Stipp: I'm Jason Stipp for Morningstar.

Morningstar's fund research team is rolling out a new fund rating that's designed to help guide investors toward those funds that we think have the brightest future prospects.

Joining me to offer the details on this new rating is Morningstar's director of fund analysis Karen Dolan.

Karen, thanks for being here.

Karen Dolan: Thank you, Jason

Stipp: So, I think most investors are familiar with the Morningstar star rating, but this rating system is different than the star rating. Can you explain what some of those key differences are?

Dolan: Absolutely. The star rating is a backward-looking measure. It looks at how a fund has performed over the long haul on a risk-adjusted basis versus peers. So, it's a quantitative measure; it's risk-adjusted returns. Also costs are in there because loads are taken out, and the returns are after fees.

This new rating is very different in that it has a lot of qualitative elements to it. We have a team of mutual fund analysts here at Morningstar, who we have had for a very long time, and these analysts are doing work that goes beyond just the numbers.

[The new rating] is pulling together the entire picture about a fund. It's qualitative, it's forward-looking, and it's really just putting that stamp of the analyst judgment, and their view on whether the fund is a good purchase or not, right on the fund, up front and center.

Stipp: So, I want to talk about the specifics of the rating in a moment, but before we get to that, qualitative research is nothing new to Morningstar. We have had analysts for many years that have been looking into mutual funds and writing reports. So, what is this rating doing? What is the layer on top of that qualitative research, and how is it providing definition for that?

Dolan: Well, we've had fund analysts at Morningstar since the 1980s, soon after Morningstar launched. We've had people on staff who are going beyond just the numbers and actually analyzing what it means, trying to figure out cause and effect. We've grown that team and invested in that team over time, and users of's Premium Service are probably used to the written analysis that we write about funds.

So, our analysts go through and discuss their outlook and their views, how the risks and the rewards and the portfolio, and all of those things come together in a written analysis. And we've been doing that for many, many years.

So, this reading is only a codification of that. So it's not different. It's just taking all of those views that we've had in written form and putting a clear data point on them through the Analyst Rating.

Stipp: And for years in the past, you have also had a list of Analyst Picks, which were a formalization of the analysts' favorite funds. How is this rating going to work with the picks?

Dolan: So, this rating will replace the picks. You're right, we have had Analyst Picks and Pans since 1999, and those are--really out of every fund that we cover--those were the very best and the very worst. So, we put that view on the extremes.

And what we're doing now is, you could think of this as filling in that middle ground. And so every fund that we cover will have an Analyst Rating, similar to the picks and pans, but just filling in the middle. This will replace the picks and pans, though. So, ... all of the picks will be re-rated under this new system.

Stipp: So, you mentioned that we're going to have more definition now in between those two extremes of pick and pan. So, what are the levels of the rating that readers can expect to see?

Read Full Transcript

{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article