Tuesday, November 15, 2011

New Morningstar Analyst Ratings

Our new Morningstar Analyst Ratings are more than 20 years in the making. We've been analyzing mutual funds since the late 1980s. Our analysts have been rating the best and worst funds as Picks and Pans since 1999. Throughout the next year, we will rate all the funds we cover.

In the past, we've used a four-person Picks committee to vet each fund nominated to be an Analyst Pick. Now, we have three separate ratings committees based on asset class, and we've spent the past five months vetting ratings.

The committees aim to ensure that Morningstar's fund analysts have fully researched all the key issues on a fund and that we are treating funds in similar fashion across the board. I encourage you to read a fund's analysis so that you can understand the analyst's thought process in arriving at the rating. Our analysts have done some excellent work in fleshing out each fund's strengths and weaknesses. The better you understand a fund the better experience you'll have.

As with our picks and pans, we are rating funds based on their long-term potential for superior risk-adjusted performance. We judge each fund's competitive advantages and disadvantages to come up with an overall rating.

Our ratings have five levels: Gold, Silver, Bronze, Neutral, and Negative. We're not imposing a bell curve on the ratings but you'll see funds spread throughout that spectrum. Even some big funds will be in the Negative and Neutral camps.

The ratings reflect a synthesis of each fund's fundamentals. We break those fundamentals down into five pillars: People, Process, Parent, Performance, and Price. These are the big, fundamental areas that are vital to a fund's long-term success. However, we don't simply tally up the pillars, as each one has some overlap with the others. It's really about how they work together, and that varies from fund to fund.

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