Morningstar Launches New Forward-Looking Fund Ratings

One of the biggest frustrations people have with Morningstar fund ratings is the backward-looking nature of the star ranking system.  Buying five-star funds can often lead to plowing into a Fairholme or a Legg Mason Value Trust at just the wrong time.  Morningstar has heard the people and is now rating 350 funds on a forward-looking basis using actual analysts.

CHICAGO, Nov. 15, 2011—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today introduced forward-looking, analyst-driven global fund ratings for approximately 350 U.S. funds. The Morningstar Analyst RatingTM for funds supplements the Morningstar RatingTM for funds, commonly known as the “star rating,” which assigns one to five stars based on a fund’s past risk- and load-adjusted returns versus category peers. In addition, Morningstar launched new, in-depth Global Fund Reports for a subset of the newly rated funds.

The new five-tiered Morningstar Analyst Rating scale has three positive levels—Gold, Silver, and Bronze—in addition to Neutral and Negative ratings. Analysts arrive at a rating through an evaluation of five key pillars they believe are crucial to predicting the future success of a fund, considering both numeric as well as qualitative factors: People, Process, Parent, Performance, and Price. Morningstar analysts score these five pillars as Positive, Neutral, or Negative, which are then combined for the overall rating.

An interesting and long-awaited development for investors, we’ll see how this plays out in practice.  You can find links to a Q&A and some information on the methodology they’ll use at the link below.




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