Morningstar changes rating system

Research house Morningstar has rolled out its new fund rating system which sees it move from a star rating system based on qualitative and quantative factors to one based on just the latter.

With this change, both retail managed fund research companies in New Zealand now award stars on a past performance basis. However, they use different methods.

Under its system Morningstar will rate funds on its new Morningstar Risk-Adjusted Return ('MRAR') measure, which assesses the fund's performance against a risk-free benchmark, and penalises funds with greater downside risk.

"The enhanced ratings system is much more proficient at determining whether or not a fund manager is adding value, and is achieved with much less complexity," Morningstar's Australasian chief executive Scott Cooley says.

"The methodology is also more sensitive to fund manager skill and fund quality, and rewards consistent good longer-term performance compared to peers. The enhanced model will also enable us to publish star ratings for more New Zealand funds, so investors and their advisers can quickly identify funds with superior risk-adjusted returns worthy of further research."

Although the qualitative element is being removed from the rating process Morningstar will still continue to offer its views on funds however it will be in what it calls "commentary form".

The other change in this area is that the qualitative research model is being "migrated from a vertical 'top down' analysis of a company's business and funds, to a horizontal approach across companies and their investment sectors.

"This approach assesses all the rated fund managers offering products in a particular asset class at the same time," head of consulting Ross Weavers says.

"The key benefits include improved direct comparability, timeliness, and currency of qualitative assessments."

Morningstar will also leverage its global relationships to initially provide qualitative commentaries for Australian-based fund managers and ultimately, fund managers based in Europe and the United States.

The new Morningstar Star Ratings will be implemented for all New Zealand funds the company rates in April, beginning with the performance period ending 31 March 2003.

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