Morningstar launches forward-looking fund ratings

Morningstar Inc. launched the first of its forward-looking mutual fund ratings for 350 U.S. funds today, which it contends will help investors evaluate the fund's future performance. The new five-tiered ratings scale has three positive levels — gold, silver and bronze, as well as a neutral and a negative rating. The ratings will supplement the star ratings Morningstar has long assigned to funds based on past performance. It first announced the new ratings system in June at its annual mutual fund conference to a positive reception from its investor audience. About 1,500 U.S. funds will be rated by the end of 2012, and the new ratings will replace the company's analyst picks and pans list. This week, Morningstar will launch the system in markets outside the U.S. where it already has analyst-driven ratings. The new ratings are designed for investors, advisers and also for gatekeepers who select funds for 401(k) plans, and will put them on a better footing with large investors that already have access to proprietary research, according to Karen Dolan, Morningstar's director of mutual fund analysis. The ratings will be available for free, just like Morningstar's popular star ratings, but investors will need a premium membership to read the supporting analysis, she said. “Putting the analyst rating out there for free is a big step in making this information more accessible,” she said. “No other company, in this country at least, is making as open and transparent information available.” The star and analyst ratings are independent of one another, and at times, the two ratings may vary widely. One example, the Clipper Fund, gets only one star from Morningstar's past-performance ranking, but it gets the top gold analyst forward-looking rating. “Past performance doesn't tell the whole story,” Ms. Dolan said. “Our analysts are not ignoring that the fund had a bad showing in 2008, but we put that into context.” Analysts look at a variety of numeric and qualitative factors called pillars in establishing a rating — people, process, parent, performance and price. “In most cases, the star and analyst ratings line up pretty well,” Ms. Dolan said. “The fundamental picture is more nuanced.”