Morningstar Manager Research Overview

Morningstar Qualitative Manager Research

Morningstar is a leading global provider of independent investment research, with more than 120 manager research analysts based across North America, Europe, Australia and Asia. The 14 member Australasian manager research team has over 14 years of average experience and has been producing qualitative manager research and ratings since 1999.

Morningstar’s qualitative manager research aims to determine which investments deserve the attention of investors and which do not. Morningstar assesses investment managers based on how we believe they will perform in the future over an economic cycle, against both peers and accepted benchmarks. Our model rewards managers that are open and transparent, have a well-run investment process and, importantly, are good fiduciaries of investors’ monies.

Morningstar is committed to the principle of independence. We do not charge asset managers to rate their strategies and associated vehicles, nor do we permit asset managers to commission ratings from us. This means that we determine our own coverage universe. Our coverage is organised across Morningstar Categories that span all major asset classes. We had full coverage on over 480 flagship strategies which mapped to over 3,000 underlying funds, ETFs and LICs at 31 July 2020.

There are three guiding principles that define the strategies Morningstar covers:

Investment Merit – As well as including some of the best-known strategies on offer globally, there is also scope for worthy but largely undiscovered strategies to fall within our review.

Client Demand – Given our user-pays philosophy, Morningstar responds to client demand to initiate strategy coverage. Correspondingly, we will cease coverage of funds and sectors where no substantial client demand exists.

Strategy Size – If there is a fund that has a large amount of assets, it is likely that coverage of the strategy will benefit a large number of investors and although there may not be current client demand, Morningstar may cover it in order to provide a view of the offering to existing investors.

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Prior to any sector review Morningstar’s category review committee meets to determine the category constituents. Funds considered for inclusion in the review include the following; analysts’ best ideas, Morningstar Prospects, fund coverage requests and client demand.

The Morningstar Analyst Rating™ is the final outcome of a collaborative process based on a site visit, manager questionnaire, quantitative and holdings-based analysis of the portfolio and an assessment of all the key issues outlined, as illustrated in the diagram below.

Following the conclusion of the manager review process, the Morningstar Australasian Manager Research Ratings Committee convenes to determine which investments deserve the attention of investors and which do not. This committee is responsible for the governance and oversight of the rating outcomes and consists of senior members of the manager research team and can include senior members from the Morningstar global analyst group. The entire Morningstar manager research team participates in the ratings process, but voting is limited to the APAC directors of manager research, the sector lead and lead strategy analyst.

The Morningstar Analyst Rating for funds is expressed on a five-tier scale running from Gold to Negative. For actively managed funds, the top three ratings of Gold, Silver, and Bronze all indicate that our analysts expect the rated investment vehicle to produce positive alpha relative to its Morningstar Category index over the long term, meaning a period of at least five years. For passive strategies, the same ratings indicate that we expect the fund to deliver alpha relative to its Morningstar Category index that is above the lesser of the category median or zero over the long term. The Analyst Rating does not express a view on a given asset class or peer group; rather, it seeks to evaluate each strategy and associated vehicle within the context of an appropriate benchmark and peer group.

Ratings for active strategies should be interpreted as follows, where performance expectations refer to performance over a holding period of at least five years, and where alpha is calculated relative to the standard Morningstar category index:

Gold

These are our top recommendations within their Morningstar Categories. Our evaluation of their key pillars in the context of the fees charged at the share-class level ranks them in the top 15% of all investments with expected positive net-of-fee alpha in their category.

Silver

These sit just below Gold but are also among our strongest investment ideas within their Morningstar Categories. Our evaluation of their key pillars in the context of the fees charged at the share-class level ranks them in the next 35% of all vehicles with expected positive net-of-fee alpha in their category.

Bronze

We do not expect these investments to perform as well as Gold or Silver offerings, but we still expect them to deliver positive net-of-fee alpha. Our evaluation of their key pillars in the context of the fees charged at the share-class level ranks them in the bottom 50% of all vehicles with expected positive net-of-fee alpha in their category.

Neutral

We expect these investments to deliver net-of-fee alpha that is less than or equal to zero. Our evaluation of their key pillars in the context of the fees charged at the share-class level ranks them in the top 70% of all vehicles with net-of-fee alpha less than or equal to zero in their category.

Negative

These are the worst investments within their Morningstar Categories in terms of our expected net- of-fee alpha. Our evaluation of their key pillars at the price level for the rated vehicle and associated share class(es) ranks them in the bottom 30% of all vehicles with expected net-of-fee alpha that is less than or equal to zero in their category.

Morningstar may also use two other designations in place of a rating:

Under Review

This designation means that a change at a rated fund requires further review to determine the impact on the rating.

Not Ratable

This designation is used only where we are providing a report on a new strategy or on a strategy where there are no relevant comparators, but where investors require information as to suitability.

Morningstar Prospects

The Morningstar Prospects list highlights strategies that the Manager Research believe are worthy of additional investor attention. Such investments likely have enduring competitive advantages and long-term appeal, but have so far not met our coverage criteria. Morningstar evaluates funds for inclusion based our standard 5P framework. Inclusion on the list does not guarantee that a strategy will be subject to full analyst coverage, and strategies can still move to full coverage without being on the Prospects list.

Annual Manager Research Schedule

Sector reviews form the basis of the Morningstar manager research process. Full reviews are conducted on annual 12-monthly cycles. The following schedule shows Morningstar Australasia’s intended fund research schedule. Morningstar reserves the right to alter this schedule on the basis of developments or unforeseen circumstances.

Communication of Ratings:

Once ratings have been decided, they are communicated to subscribers through the publication of our fund reports. Subscribers are notified of ratings changes through a daily research update email.

No external parties are alerted to ratings changes prior to report publication.

Fund coverage requests can be submitted to Aman Ramrakha.

For any queries, please contact:

Tim Murphy, CFA, CAIA
Director of Manager Research
+61 2 9276 4436 (AUS)
tim.murphy@morningstar.com 

Aman Ramrakha, CIMA
Director of Manager Research Ratings
+61 499 550 986 (AUS)
aman.ramrakha@morningstar.com

Morningstar Manager Research Team Qualifications, Tenure and Industry Experience (as at September 2020)