The firm expects the new rating to be rolled out later this year and will follow the same methodology as its existing star ratings system, which rests on an assessment of five key pillars: process, performance, people, parent and price.
Hortense Bioy, Morningstar’s director of European passive funds research said the new ratings are a natural extension of the firm’s existing research as it has been providing qualitative research and analyst reports on some 650 ETFs worldwide for more than eight years, and launched Analyst Ratings for index funds in the UK in 2013.
According to the firm, the ratings aim to provide investors with a qualitative rating that signals Morningstar analysts’ conviction in a fund’s ability to outperform relevant peers, including both mutual funds and ETFs, on a risk-adjusted basis over a full market cycle. This includes not only cost, tracking error and tracking difference (a measure of by how much the performance of the fund deviates from the performance of the index over a year), but also the longevity of the management team and the parent company behind the funds.
While Morningstar aims to take a holistic approach, the key focus of the rating, Bioy told Portfolio Adviser is the index being tracked and whether or not it is the best way to track a particular market.
In an explanatory note to the methodology used, Morningstar explained it as: “We reserve our Medalist ratings for those funds that are best-suited to deliver precise tracking of sensibly constructed indexes at a very low cost over a long time frame—ones backed by experienced managers and sponsored by firms that are good stewards of investors’ capital.”
These are the index funds and ETFs that we are confident will outperform their peer group, within the context of the level of risk taken, over the longer term
The coverage universe is expected to expand over time.
