Breaking Down the New Morningstar Medalist Framework Updates

Morningstar recently hosted a webinar exploring enhancements to our Medalist Rating methodology for semi-liquid funds. The session focused on how we evaluate fees, liquidity risks, manager quality, and other factors that influence analyst-driven ratings across interval funds, tender-offer funds, non-traded business development companies (BDCs), and non-traded REITs.

The webinar featured Dan Culloton, Senior Principal, Manager Research at Morningstar, and Bryan Armour, Director of ETF and Semi-Liquid Research at Morningstar. They walked advisors through new cost-estimate data, improvements to fee scoring, and changes designed to create more consistent comparisons across semi-liquid investments.

As advisor interest in private credit, private equity, and other alternative investments continues to grow, understanding how Morningstar evaluates semi-liquid funds is becoming increasingly important. Below are some of the most relevant questions raised during the webinar and the answers shared by our research team.

A: Our approach depends primarily on the structure of the investment vehicle and the degree of exposure to illiquid assets rather than simply whether a fund owns public and private investments. Traditional mutual funds and ETFs can hold some private investments, while semi-liquid funds are often designed specifically to provide greater access to private markets.

Regardless of structure, our research focuses heavily on how effectively portfolio managers handle liquidity risks and integrate illiquid investments into the broader portfolio. As Brian Armor explained, "whether they do it well, whether they manage the liquidity risks well, is going to be critical for the ratings of both."

From Morningstar's perspective, strong liquidity management remains a key differentiator regardless of whether a strategy sits within a traditional or semi-liquid structure.

A: Yes. Morningstar's qualitative fund rating framework has been in place for approximately 15 years and has evolved into today's Medalist Rating methodology for both traditional and semi-liquid funds. According to the speakers, historical research has shown that the ratings have demonstrated predictive value, particularly at the highest and lowest ends of the rating spectrum.

As Dan Culloton noted, "the studies show that we're really very good at picking at the extremes at gold and negative, and particularly against peers, category peers."

Our view is that this long-term record reinforces the value of combining analyst assessments of Parent, People, Process, and fees into a forward-looking evaluation.

A: There is no specific fund type that is inherently more likely to receive an upgrade or downgrade. Instead, changes are largely driven by where a fund currently sits relative to rating thresholds and how the revised fee calculations affect its overall score.

Funds that historically reported fees more conservatively may benefit somewhat from the introduction of cost estimates because the new framework improves fee comparability across the category. As Bryan Armour explained, "Typically, the more conservative the prospectus expense ratio, then the better the outcome in terms of this switch to cost estimates."

Importantly, fee adjustments remain only one component of the rating. Parent, Process, and People pillar assessments continue to drive the vast majority of rating outcomes.

A: In practice, the impact was limited. Morningstar analysts already made qualitative adjustments when fee disclosures appeared inconsistent or failed to fully reflect investor costs. However, those adjustments required manual review and judgment.

According to Bryan Armour, "It didn't really affect any ratings. I don't think we ever rated any that were not including performance fees, for example, in their prospectus expense ratio."

The updated methodology introduces standardized cost estimates that help create a more systematic and comparable framework, particularly in areas where performance fees, leverage expenses, or acquired fund fees can complicate reported expense ratios.

A: Morningstar designed the cost-estimate framework to avoid becoming overly sensitive to changing market conditions. Rather than making short-term market forecasts, the methodology relies on standardized assumptions tied to long-term asset-class characteristics and broadly applicable benchmarks.

As Bryan Armour explained, "The return assumptions are static for things like private equity, and they're based on long-term returns and performance provided by PitchBook and the like."

Additionally, assumptions tied to private credit and fixed-income investments incorporate floating-rate measures such as SOFR, helping maintain consistency across varying interest-rate environments. This approach supports comparability while reducing the impact of temporary market fluctuations.

A: Evaluating alternative asset managers requires extensive due diligence. Our analysts conduct meetings across multiple functions within an organization, including portfolio management, executive leadership, risk management, legal, and compliance teams.

The research process also involves evaluating liquidity waterfalls, redemption management capabilities, and the firm's ability to operate through periods of elevated redemption activity. As Bryan Armour described it, "It really just requires our analysts to dig in, keep going until we fully understand exactly how the firm approaches both."

Because deal sourcing and liquidity management vary significantly across firms and asset classes, Morningstar's approach emphasizes deep research rather than a one-size-fits-all checklist.

A: Morningstar intends its Medalist Ratings to be comparable across investment structures. A Gold, Silver, or Bronze rating on a semi-liquid fund reflects our conviction that the strategy can outperform an appropriate public-market benchmark over a full market cycle.

As Bryan Armour stated, "If it has a medalist rating, we expect it to be an improvement over a public market benchmark."

That means advisors can evaluate semi-liquid funds alongside mutual funds and ETFs using the same rating framework. The ultimate allocation decision, however, should still reflect client objectives, liquidity needs, investment horizon, and overall portfolio construction considerations.

The webinar highlighted Morningstar's efforts to make semi-liquid fund ratings, fee comparisons, and alternative investment due diligence more transparent and consistent. While the methodology enhancements may lead to some modest rating changes, the fundamental drivers of our Medalist Ratings remain unchanged: assessing the quality of a firm's stewardship, investment process, and people.

For advisors evaluating growing opportunities in private credit, private equity, and other semi-liquid strategies, we believe the updated methodology offers a clearer lens through which to compare funds and understand the true costs investors may face. Most importantly, the Q&A reinforced that strong manager selection, thoughtful liquidity management, and investor-focused practices remain at the center of Morningstar's research approach.