Morningstar recently announced plans to change the underlying engine for its Analyst Ratings. The changes mean funds will now be rated by share class. The idea is to get cost-to-investor data into the forward-looking ratings. Investor results, after all, are impacted by the fees, and those vary by share class.
Morningstar's Analyst Ratings are meant to be forward-looking ratings assigned by the firm's analysts, with funds falling into categories of Gold, Silver, Bronze, Neutral and Negative. The updated methodology does not change the firm's star ratings.
Overall, the percentage of active funds earning the Gold, Silver or Bronze rating would fall under the new methodology. The percentage of passively managed index funds with those ratings would rise, according to Jeffrey Ptak, global director of manager research. Generally speaking, passive funds are cheaper.
Ptak found that the rating change would affect 43% of funds and ETFs, and there will be twice as many downgrades as upgrades. But most of the funds affected would see their rating move by just one rung.
In addition, about one-quarter of "above-average" or "high-fee" funds would receive the Gold, Silver or Bronze ratings, down from about half today.
“This shift would stem at least partly from assigning Analyst Ratings to individual share classes,” Ptak writes. “To this point, we have assigned the same rating to each of a fund’s share classes irrespective of fee differences. Going forward, we would vary the ratings we assign to share classes by taking these fee differences into account. All things being equal, more-expensive share classes of funds would receive lower ratings and vice versa for cheaper share classes.”
