Rating Changes 2019
We’ve made some improvements to our Analyst Rating for funds that will make it easier to understand and use. Specifically, the enhanced rating will provide better guidance for investors choosing between active and indexed strategies or deciding between different share classes of the same fund. Read more
A mutual fund or exchange-traded fund might receive a different rating under our new ratings system than it did under our old one. We expect fund downgrades to outnumber upgrades, but we cannot definitively say until we have re-rated each strategy. Each fund we cover is scheduled for annual review on a rolling schedule, so all funds under coverage will be updated over the next 12 months.
A big reason a fund’s rating might change is because of its underlying fee structure. More expensive share classes of strategies we have rated highly are likely to see downgrades because we now rate each share class’ fees separately. (We used to rate one representative fund share class.)
The new rating also sets a higher bar for active strategies, so we expect some strategies will not clear this hurdle and will see downgrades as a result.
A downgrade doesn’t necessarily mean you should sell your investment. Think of it as an opportunity to reassess whether it’s still the best choice for you.
The Analyst Rating can a very helpful tool for choosing funds, but it should be used in the context of a broader plan that considers your goals and circumstances. In some cases, a fund with a lower Analyst Rating might be a more appropriate choice. For example, you may invest in fund share classes with higher fees, with a portion of those fees used to compensate registered representatives for advice they provide to investors in those share classes. Though higher-fee funds tend to receive lower Analyst Ratings, these fund share classes might be an appropriate choice for investors seeking advice under certain circumstances.
We are always looking for ways to improve our ratings and research methods. In an effort to make the Morningstar Analyst Rating as useful as possible, we studied how well it has worked over time to identify winning funds. We found that Process, People, and Parent are the three most predictive pillars; therefore, we refocused our rating around them. A thorough assessment of a strategy’s Process, Parent, and People then yields an assessment of how likely it is to outperform its peers. We eliminated the separate Performance Pillar because we believe a fund’s performance assessment is most meaningful when it takes place within the context of a broader, forward-looking evaluation of the investment process, people, and parent firm backing each.
Finally, we’re giving fees even more weight: Going forward, we will subtract each share class’ expenses from the analysts’ estimate of the value the strategy can add. This improvement allows us to assign Analyst Ratings to fund share classes, taking fee differences into account.
The changes we are making to our Analyst Rating make it a better gauge of which funds will perform well in the future, as opposed to rewarding those that performed well in the past. We believe a fund’s performance assessment is most meaningful when it takes place within the context of a broader evaluation of its investment process, people, and parent firm. Our research has found that these are the three most predictive pillars, so we are refocusing our rating around them. A thorough assessment of a strategy’s process, people, and parent then yields an assessment of how likely it is to outperform its peers.
As for the Price Pillar, fees will be accounted for in a different way that gives them even more weight. Going forward, we will subtract each share class’ expenses from the analysts’ estimate of the excess return the strategy can generate before fees. Doing this allows us to tailor Analyst Ratings to each share class based on fee differences, because expensive fund share classes will underperform cheaper share classes. Previously, analysts assigned a Price rating based on a single, representative share class rather than scoring the price of each share class separately.
Share classes represent different ways fund companies package their product. The basic product is the “strategy”— which is what you probably think of as “the fund.” For example, American Funds Growth Fund of America is a strategy. American Fund Growth Fund of America has many share classes that are represented by unique tickers; for instance, the ticker for the A share class of the strategy is AGTHX; a no-load share class is GFAFX; and one of the share classes designed for use in retirement plans is RGAGX.
Each share class has its own fees and expenses, and its own performance profile as a result. Fund companies offer various share classes to allow the investor to select a fee/expense structure that is most appropriate for them given their specific situation.
The new way we account for a strategy offered via different share classes is intended to make it easier for investors to choose between share classes.
Funds rated after Oct. 31, 2019, will use our new ratings system.
The Quote pages for funds rated under our new system will display three pillars: Process, People, and Parent. Funds rated under our old system will still display five Pillars.
You can see the date of the most recently published analysis in some Premium tools as well. “Analysis Date” is shown in Portfolio Manager’s “News & Opinions” and “Insights” Tracking views. It is also the first data point listed in the Premium Fund Screener “Snapshot” view results page.
Annual Report Net Expense Ratio
Analyst Rating under Former Methodology
New Analyst Rating
|Fund XYZ Admin||0.96|
|Fund XYZ Instl||0.71|
|Fund XYZ A||1.05|
|Fund XYZ C||1.82|
|Fund XYZ R||1.32|
|Fund XYZ I2||0.81|
New site navigation
|Monthly||1 year||2 year||3 year|