Morningstar to Introduce Forward-Looking Morningstar Analyst Rating™ for Funds, New Uniform Approach for Global Fund Research Reports

CHICAGO, June 9, 2011 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its plans to introduce forward-looking, analyst-driven global fund ratings and a uniform approach for global fund research reports. The ratings and reports will be based on analysts' convictions about a fund's ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. The company plans to launch the new ratings and research reports in the United States, Canada, Europe, Asia, Australia, and New Zealand in the fourth quarter.

The new Morningstar Analyst Rating™ for funds is a qualitative, forward-looking measure based on analyst research, whereas the well-known Morningstar Rating™ for funds, or the "star rating," is a purely quantitative, backward-looking measure that rates historical performance based on risk- and cost-adjusted returns without any input from Morningstar's analysts. The new analyst ratings will not replace the star ratings, and the existing star rating methodology will not change. Morningstar considers the new Analyst Rating to be an "aptitude test" that is intended to supplement the star rating, which is an "achievement test."

Morningstar will not charge fund groups to be rated, and its decision to rate and report on a specific fund is made solely by the analyst team based on factors such as investor interest and asset size. In the United States, the new ratings and research reports will replace the company's "Analyst Picks and Pans," a proprietary list of most-favorite and least-favorite funds chosen by Morningstar's analysts in each investment category. In markets where Morningstar already has analyst-driven ratings, such as the United Kingdom, Europe, Asia, and Australia, the new system will replace the previous analyst ratings scale.

The new Morningstar Analyst Rating™ for funds will be assigned as one of five ratings—AAA, AA, A, Neutral, or Negative. Analysts arrive at a rating through an evaluation of five key pillars Morningstar believes are crucial to predicting the future success of a fund: People, Process, Parent, Performance, and Price. If a fund receives a positive rating of AAA, AA, or A, it means Morningstar analysts think highly of the fund and expect it to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over a full market cycle of at least five years. The ratings scale is as follows:

• Positive Ratings:
  • AAA: Best-of-breed fund that distinguishes itself across the five pillars and has garnered the analysts' highest level of conviction;
  • AA: Fund with notable advantages across several, but perhaps not all, of the five pillars—strengths that give the analysts a high level of conviction;
  • A: Fund with advantages that outweigh any disadvantages across the five pillars, with sufficient level of analyst conviction to warrant a positive rating;
• Neutral: Fund that isn't likely to deliver standout returns, but also isn't likely to significantly underperform; and
• Negative: Fund with at least one flaw that is likely to significantly hamper future performance, and is considered an inferior offering to its peers.

"Morningstar has been providing independent, analyst-driven fund research for 25 years, but we've now codified the various evaluation methods used by our team of more than 90 analysts around the world to create one harmonized global rating system. The rating is designed to supplement the fund due diligence process for investors and advisors and identify funds worth investing in over the long term. It is not designed to be a short-term market call on an asset class. The new rating system better surfaces the work of our global research team and helps investors determine whether Morningstar analysts think a fund is worth considering," said Don Phillips, president of fund research at Morningstar. "Analysts will assign positive ratings to funds they believe have enduring advantages and expect to outperform over the long term. Unlike many of our competitors, our ratings scale is unique because we're not only identifying good funds, but mediocre and poor ones as well."

The Morningstar Analyst Rating™ evaluates funds on five key pillars, considering both numeric as well as analyst-driven factors. This approach notably puts only partial weight on past performance and backward-looking risk measures and does not dismiss funds that have underperformed or have limited track records. It will also be more responsive to significant changes at a fund or parent organization. The five pillars are:

• People: Quality of a fund's investment team, based on factors including its experience, stability, structure, communication, and alignment of interests with fund shareholders;
• Process: Quality of investment process—in terms of both security selection and portfolio construction—and whether it is sensible, clearly defined, and repeatable. Also judges whether the process is effectively implemented and whether the portfolio is consistent with the stated process;
• Parent: Quality of the parent organization, including capacity and risk management, recruitment and retention of talent, incentive pay, and culture of stewardship;
• Performance: Evaluation of long-term returns, consistency of performance in different market conditions, and performance relative to manager changes and changes in asset size; and
• Price: Evaluation of annual expense ratios, and performance fees if appropriate, within the context of the relevant market or cross-border region.

The new Analyst Ratings for funds will be available for free on Morningstar.com®, the company's investment information website for individual investors. A written analysis of the fund and an explanation of the Analyst Rating, along with the most significant data surrounding the five pillars, will be available through the paid Premium Membership on Morningstar.com.

Financial advisors will have access to the Analyst Ratings and the in-depth Morningstar Global Fund Research Reports for funds available for sale in the United States through Morningstar's advisor software products such as Morningstar Office(SM), a portfolio management solution for independent advisors. The in-depth reports include additional analysis about each pillar and a wealth of graphics, data, and other statistics.

The Analyst Ratings and in-depth Global Fund Research Reports for all the funds that Morningstar covers worldwide will be available in Morningstar Direct(SM), the company's web-based global research platform for institutional investors.

Morningstar plans to launch between 150 and 200 analyst ratings and reports for U.S. funds in the fourth quarter, focusing on funds that have garnered the most investor interest and assets. Over the next year, the company aims to cover more than 1,500 U.S. funds that collectively represent more than 80 percent of industry assets. In addition to the largest funds, the analyst team will devote a portion of its coverage universe to smaller funds with distinguishing characteristics. Morningstar has more than 90 fund and ETF analysts worldwide who cover about $9 trillion in assets globally. The company provides data on approximately 140,000 mutual fund share classes.

In addition, Morningstar plans to adjust its methodology for the Stewardship Grades for funds in the United States. Later this year, Morningstar will begin to replace the individual fund grades with parent-level Stewardship Grades using an A-F grading scale for more than 20 fund firms, and aims to complete the full shift to the new methodology in 2012. The parent-level Stewardship Grades will be part of the Parent pillar in the new Analyst Rating. Morningstar's analysis of stewardship, which the firm began in 2004, is designed to help investors research, identify, and compare fund managers and fund companies that do a good job—or a poor job—of serving fund shareholders' interests. The company currently assigns Stewardship Grades to more than 1,000 funds across 45 fund firms.

Morningstar's Analyst Ratings for 529 college savings plans and target-date funds in the United States will adopt the new Analyst Rating scale of AAA, AA, A, Neutral, and Negative next year.

For more information about the Analyst Rating for funds, please visit http://global.morningstar.com/AnalystRatingForFunds.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 390,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 5 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services and has nearly $140 billion in assets under advisement and management as of March 31, 2011. The company has operations in 26 countries.

Analyst Ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst Ratings are based on Morningstar's current expectations about future events and therefore involve unknown risks and uncertainties that may cause Morningstar's expectations not to occur or to differ significantly from what was expected. Morningstar does not represent its Analyst Ratings to be guarantees nor should they be viewed as an assessment of a fund's or the fund's underlying securities' creditworthiness.

©2011 Morningstar, Inc.  All rights reserved.

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Media Contacts:
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SOURCE Morningstar, Inc.