New dawn for Morningstar? Firm launching different ratings system

Morningstar Inc. has announced plans for a forward-looking rating system for mutual funds that will start showing up as early as this fall. Unlike the star rating system, which is based on historical performance, the new analyst rating will be broader in scope, qualitative, more flexible — and will include much of Morningstar's research into stewardship at the fund company level. “This is designed to be a supplement to the star rating system,” said Don Phillips, president of fund research at Morningstar. “The star rating is like an achievement test, and the new analyst rating is like an aptitude test,” he added. The new ratings, which will include single-A to triple A on the positive end, neutral and negative, will start showing up on about 200 funds this fall. Over the next 12 months, Mr. Phillips expects the ratings to be applied to about 1500 funds, and the expansion will continue from there. Unlike the star ratings, which require funds to be in existence at least three years, the analyst ratings can be applied at any time, and can be adjusted regularly based on Morningstar's research. “This is not a market call; we won't be second-guessing money managers,” Mr. Phillips said. “This is not a short-term predictor and it's not a credit rating.” Morningstar already applies the analyst ratings to funds in several foreign countries, including Australia, where it is a regulatory requirement. Based on the pattern of ratings in other parts of the world, Mr. Phillips estimated that between 10% and 20% of funds would qualify for a positive rating, while about a fifth of the funds would receive negative ratings. The majority of funds likely will be rated as neutral, he said. Like the star ratings, the analyst ratings will be available for free on the Morningstar website, while more detailed reports will be available only to paid subscribers. Morningstar last upgraded its rating system in 2002, when it started rating funds relative to individual categories.