ratings performance in upgrade of fund...jul 08, 2019 · 7/8/2019 morningstar emphasizes fees,...
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7/8/2019 Morningstar emphasizes fees, performance in upgrade of fund ratings
https://www.investmentnews.com/article/20190708/FREE/190709963/morningstar-emphasizes-fees-performance-in-upgrade-of-fund-ratings?NLID=da… 1/7
Morningstar emphasizes fees,performance in upgrade of fundratingsChanges to forward-looking analysts' ratings could lead to moredowngrades than upgrades
Jul 8, 2019 @ 2:25 pmBy Jeff Benjamin
In the latest iteration of its forward-looking analysts'ratings, Morningstar Inc. is placing more emphasis onfees and raising the bar for actively managed funds,which will be required to beat both their benchmark andtheir peer group to earn higher scores.
Unlike Morningstar's better-known star rating system,which is based on historical performance, the analysts'ratings are designed to give investors and �nancialadvisers a perspective on how a fund is likely to stack upin the future.
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7/8/2019 Morningstar emphasizes fees, performance in upgrade of fund ratings
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Two signi�cantchanges to the wayfunds will beevaluated beginningin November involvea greater emphasison fund fees and ahigher bar forperformance, saidJeffrey Ptak,
Morningstar's global director of manager research.
As a part of the increased focus on fees, the ratingsystem, which was �rst introduced in 2011 and coversmore than 4,000 individual funds, will factor in fees atdifferent share-class levels. Until now, the gold, silver,bronze, neutral and negative ratings were appliedsingularly across a fund's various share classes.
"What that [original method] missed was conveying thedifferences in share classes, so we're now tailoringratings to individual share classes," Mr. Ptak said. "Forexample, share classes that embed fee increments to payfor distribution will now be penalized, and we'll probablysee downgrades outnumber upgrades."
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Globally, the analysts' ratings cover 4,004 unique funds,which expands to 21,415 when taking into accountmultiple share classes.
There are analyst ratings for 1,914 U.S. funds, whichexpands to 8,330 when factoring in multiple shareclasses.
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7/8/2019 Morningstar emphasizes fees, performance in upgrade of fund ratings
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Among the unique U.S. funds, 172 are gold medalists,388 are silver-rated, 618 bronze-rated, 694 neutral-ratedand 33 funds have negative ratings. (Another nine fundsare under review and not currently rated.)
Mr. Ptak said that unlike the performance-based starratings, which are designed for a bell-curve-shapeddistribution across the fund universe, the analysts' ratingstend to skew more positive because the funds are beingsubjectively selected for review.
The new evaluation process includes an analysis of the"people, process and parent company," Mr. Ptak said,explaining that performance and price are not beingremoved, just calculated in a different part of theprocess.
Price, for example,will be evaluatedafter all otheranalysis has beencompleted.
Todd Rosenbluth,director of mutualfund and ETFresearch at CFRA, a
competitor to Morningstar, said fees are front and centerfor more advisers and any increased emphasis will bewelcomed.
"Advisers are increasingly gravitating to the cheapestmutual funds and incorporating fund expense ratios intotheir due diligence rather than relying on performancesuccess that can be �eeting," Mr. Rosenbluth said. "In thepast, strong performing funds would see strong in�ows,but given the competition from ETFs, some of thesefunds have been bleeding assets."
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7/8/2019 Morningstar emphasizes fees, performance in upgrade of fund ratings
https://www.investmentnews.com/article/20190708/FREE/190709963/morningstar-emphasizes-fees-performance-in-upgrade-of-fund-ratings?NLID=da… 4/7
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Mr. Ptak said that performance analysis "is not goingaway, but we wanted to make sure it's evaluated in theright context. If a value strategy does well in a growthmarket, for example, we want to make sure it's truly avalue strategy."
The new performance bar also requires a fund to beatboth its benchmark and peer group net of fees in order toachieve a higher rating. Until now, a fund only had to beatone of the two, not both.
Time will tellwhether �nancialadvisers will pick upon and appreciatethe nuancedchanges, but it isclear advisers arepaying attention.
"Screening activefund managers with a signi�cant emphasis on fees couldpotentially include more of the larger big-name funds withlow fees and at the same time exclude smaller, morenimble funds with seasoned managers that may warranttheir higher expenses," said Jon Ulin, managing principalat Ulin & Co. Wealth Management.
"In most cases, the outcome of an active mutual fund'sperformance does not always live up to its grandiosename, star ratings or competing to be the lowest-costplayer in their sector," Mr. Ulin said. "We remind investorsand clients that outside of screening for fees and shareclasses, to not pick an active fund by its star ratings orpast performance, which is a case of hindsight bias andchasing returns."
Kashif Ahmed, president of American Private Wealth,confessed to having a "low opinion" of star ratings and
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7/8/2019 Morningstar emphasizes fees, performance in upgrade of fund ratings
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medals, but described Morningstar's latest tweaks as"meaningful changes."
"Some funds have way too many share classes and mostinvestors can't �gure out why, and more importantly thefees can be different on the same fund," he said. "IfMorningstar can achieve this without confusing investorseven more, I think it is a positive thing."
Rose Swanger, president of Advise Finance, remindsinvestors that any kind of ratings for funds should only bea starting point.
"Looking for funds with gold- and �ve-star ratings is onlythe beginning,"Ms. Swanger said. "Next, you have tocheck out the fees, inception date, manager tenure, yield,etc., before adding to one's portfolio."
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