Using Morningstar Analyst Ratings to Find Buy Candidates

The Morningstar Analyst Ratings are in Morningstar.com's  Premium Fund Screener tool and can help speed your research process along. Select a category and choose Morningstar Analyst Rating > Neutral, and you'll see all the medalists in that category.

If it's a big category, that might still leave you with a fair number of funds. Here are some ways to narrow the search further. For moderate allocation, you might want to add a no-load screen. Go to Fees & Expenses and select No-Load Funds = Yes. You want one that's open to new investors, so select Closed to New Investment = No. You don't want extraneous share classes, so choose Distinct Portfolio Only = Yes. Now you are down to 14 funds. You don't want institutional funds, so go to Minimum Purchase and select Institutional Funds = No. Now we have 12 funds. That's a pretty manageable group, though of course you could add more screens such as expense ratio, manager tenure, or credit quality.

You can also customize the screen to find a good diversifier for your portfolio. If you have a sizable investment in an Asia fund and you are shopping for a foreign fund, you could set a limit for exposure to Asia. So, keep most of the screens above, only change fund category to foreign large-blend and then set Regional Exposure to % Pacific < 20. That takes us down to 11 funds. If you want to narrow the field some more, you can raise the Morningstar Analyst Rating bar to Silver or better, and now you have six.

What if you are looking for a large-blend index fund for the core of your portfolio? Delete the Pacific screen and change the category to large blend. Let's stay choosy and leave the Morningstar Analyst Rating screen at better than Bronze. Go to Special Fund Types and select Index Funds = Yes. Now we have five funds. However, with index funds, many firms offer lower costs the more you invest. So, delete the Distinct Portfolio Only screen. 

At the results screen, select Nuts & Bolts in the View dropdown menu. You'll see two key items of data: expense ratios and minimum initial purchases. You can rank by either to help yourself. (Click on the column header to organize the list.) Ranking by costs, I see  Vanguard 500 Index Admiral (VFIAX) at a mere 0.05%.  Vanguard Total Stock Market Index Admiral (VTSAX) also costs 0.05%, and the Admiral shares for index funds have minimum initial purchases of $10,000. So, if you want to keep costs low and can make that hurdle, you probably want to pick between the two.

Change the View to Portfolio and you can see some key stats. In particular, the average market cap is telling. The S&P 500 funds have market caps around $55 billion, and the total stock market funds have market caps around $31 billion. Depending on your weighting in small caps versus mega-caps, one or the other might be a better fit.

Let's do one last screen to illustrate some ways to change the screen view. Remove the Index screen and change the category to mid-cap growth. Change the Morningstar Analyst Rating screen to better than Neutral, and add back the Distinct Portfolio Only screen. Now we have 15 funds. Let's use the data view to help us pick further. At the View dropdown in the results screen, choose Create/Modify Custom View and select some key data. I'll go with Morningstar Analyst Rating, Expense Ratio, Turnover Ratio, 5 Year Return, 10 Year Return, 15 Year Return, Fund Size (Total Assets in $MM), and Fund Manager Tenure. You can save this data view so that you can use it anytime you want to compare funds.

I chose to rank on expense ratio. The cheapest funds are mostly Bronze, but there is one Gold fund,  PRIMECAP Odyssey Aggressive Growth (POAGX). Let's toss the three priciest funds. You can check a box next to their names and choose Delete. Now I'm going to rank on turnover. Let's toss the two highest-turnover funds--turnover isn't a great predictor of performance, but I'd rather have a patient fund. Now we are down to 10. Ranking by total assets, we can see there are three really big funds, so I'll delete them. Now we have just seven funds. You can now do a deep dive on those seven, or you can choose your favorites and select Score on Preference above the results to score your finalists and see which comes out on top.

For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.