Morningstar Guide to Investing: Part II
Learn how to use Morningstar's data, tools and research to reach better financial outcomes
Investing product overview
Now that you have learned some of the foundational concepts of investing, you are ready to continue your journey towards becoming a Morningstar investor.
Morningstar provides independent, fundamental analysis of a wide range of investments including equities, managed funds, ETFs, and LICs. We have a dedicated team of over 30 equity, credit, and manager research analysts in Sydney covering the local market and a global team of 270 analysts. Worldwide we cover 1,600 stocks, 700 debt issuers, and 4,380 funds and ETFs.
We have provided a brief description of each asset class and described our research methodology and where to access our research.
Equities
Buying an equity gives you partial ownership of a company. As a partial owner, you have a share of any assets owned by the company, earnings generated by selling products, as well as any liabilities the company may have. If you owned Apple stock before they invented the iPhone, you benefited from the resulting success of the product. At the same time, if you invest in a company that performs poorly or is adversely impacted by global trends or events, you share in the downside. In the case of the company you own going out of business, this can result in a complete loss of your investment.
At Morningstar, we believe buying shares of superior businesses and allowing them to compound over time is the surest way to create wealth in the stock market. The long-term fundamentals of businesses, such as cash flow, competition, economic cycles, and stewardship, are our primary focus areas because history has shown that market sentiment is fleeting, momentum can quickly reverse, and the herd is sometimes a dangerous crowd.
Our focus is on the intrinsic value of a security. Occasionally, this approach causes our recommendations to appear out of step, but willingness to be contrarian is an important source of outperformance and a benefit of Morningstar’s independence.
There are three key components that go into our fundamental analysis of equity securities:
- Economic moat: The economic moat concept is a cornerstone of Morningstar’s investment philosophy and is used to distinguish high-quality companies. An economic moat is a structural feature that allows a firm to sustain excess returns on invested capital over a long period. Without a moat, profits are more susceptible to competition. We have identified five sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and efficient scale.
- Fair value estimate: Our fair value estimate is primarily based on Morningstar’s proprietary three-stage discounted cash-flow model. We’re looking well beyond next quarter to determine the cash-generating ability of a company’s assets because history has shown the market price of a security will migrate towards the firm’s intrinsic value over time.
- Uncertainty rating: The Morningstar uncertainty rating demonstrates our assessment of a firm’s cash-flow predictability, or valuation risk. From this rating, we determine appropriate margins of safety: the higher the uncertainty, the wider the margin of safety around our fair value estimate before our recommendations are triggered.
Our recommendations are based on the current share price relative to Morningstar’s fair value estimate after adjusting for an appropriate margin of safety. Our equity research reports provide the following ratings:
Managed funds, ETFs and LICs
Pooled investment vehicles offer a diversified portfolio, managed by a professional fund manager, in a single investment. They come in three main types: managed funds, exchange-traded funds (ETFs), and listed investment companies (LICs).
These vehicles cover various asset classes including bonds, property, and stocks. The investment strategies range from simple, low-cost, index strategies all the way to higher cost, active approaches, and also include some complex options that employ derivatives and other methods. There is a huge array of investment choices, so Morningstar offers several tools to help investors narrow down which investments may be appropriate for them, and just as importantly, which investments should be avoided or treated with caution.
Morningstar Medalist Rating
The Morningstar Medalist Rating is a forward looking rating that provides investors insights into which investments deserve their attention.
The Medalist 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.
Morningstar expresses the Morningstar Medalist Rating on a five-tier scale running from Gold to Negative. For actively managed funds, Morningstar assigns Gold, Silver, and Bronze ratings to vehicles expected to add value, or “positive alpha,” over the long term when compared with a relevant Morningstar Category index after accounting for fees and risk. For passive strategies, Morningstar assigns Gold, Silver, and Bronze ratings to vehicles expected to deliver alpha that exceeds the lesser of the category median net alpha, or zero, over the long term. (Morningstar defines “long term” as periods lasting at least five years.)
In more than two decades of manager research, Morningstar’s global analyst team has identified three key areas that evidence suggests are crucial to predicting the future gross performance of strategies and their associated vehicles: People, Parent, and Process. These three pillars form the spine of Morningstar’s research approach, with analysis coalescing around an evaluation of:
- The strategy’s management team (People)
- The parent firm (Parent), and
- The underlying investment process itself (Process).
In this way, the analysis considers not just each pillar in isolation but also the interaction between them, which is crucial to understanding a vehicle’s overall merit.
In essence, think of the Medalist Rating as an aptitude test of future performance.
Note: effective 2 May 2023, we have updated our framework for rating funds. The Morningstar Medalist Rating replaces the Morningstar Analyst Rating. For more information, please read this announcement or our frequently-asked questions. Please refer to the Morningstar Medalist Rating methodology document for more detailed information.
Morningstar’s manager research team
Morningstar has a network of more than 110 manager research analysts located across the firm’s offices in Sydney, Chicago, London, and Hong Kong. In Sydney, our team of more than 10 manager research analysts have more than a decade of experience on average. These analysts share global insights, analysis, and investment data.
ETFs
ETFs share three qualities: they’re pooled investment vehicles, their shares trade on stock exchanges, and they have a daily share creation and redemption mechanism. An ETF can be thought of as a managed fund whose shares happen to trade on stock exchanges. The largest and oldest ETFs are passive investments, which merely try to replicate the behaviour of a market or market segment.
Managed funds
Managed funds pool the money of individuals for investment by a professional fund manager. They are not listed on the exchange, and investors apply to invest or redeem directly with fund managers, or via investment platforms or the ASX’s mFunds service. Investments in managed funds are processed through the creation and redemption of fund shares at the end of each trading day. Through this process the managed fund will always trade at the net asset value of the underlying assets within the fund.
How we can help you achieve your financial goals
Morningstar’s core mission is to help individual investors make better financial decisions. The following section outlines how we help investors achieve better financial outcomes.
Discover new investments Morningstar provides a variety of ways that you can discover new investments including:
- pre-defined stock screens that show our 5 star and wide moat ideas across a variety of geographic regions
- pre-defined fund screens that show our Gold, Silver and Bronze rated funds across a number of asset classes
- pre-defined ETF screens that show our Gold, Silver and Bronze rated ETFs across a number of asset classes
- investment filters that allow users to select criteria to search our database of over 53,000 stocks, funds and ETFs
Stock Screener
The Morningstar Stock Screener is a tool that can be used to search for stocks by sector, market cap, and key criteria including performance figures and valuation ratios. You can also include criteria such as our analyst recommendations, economic moat, stewardship rating, fair value uncertainty or three analyst pre-defined searches.
Fund Screener
The Morningstar Fund Screener is a tool that can be used to find investment trusts, superannuation funds, pensions and annuities by fund manager, category, assets, minimum investment and returns criteria. We also include the Morningstar Rating as a search criteria.
Global Equity Best Ideas
Morningstar’s monthly Global Equity Best Ideas is a compilation of stock ideas sourced from Morningstar’s global equity research team. Coverage includes companies based in Australia & New Zealand, Asia, the Americas and Europe, which are currently trading at significant discounts to our assessed fair values.
How to evaluate investments
As a leading independent provider of investment research, Morningstar provides our readers with support in assessing new investment ideas, reviewing current portfolio holdings and / or validating third-party advice.
Morningstar’s Equity Research Reports
Morningstar’s Equity Research Reports provide a comprehensive view of each security that we cover. We provide an overall recommendation based on our calculated intrinsic value compared to the current price of the security. The key to our evaluation of each security is our assessment of the four key components of our fundamental analysis: the fair value estimate, uncertainty rating, economic moat and stewardship rating. Our analyst report also includes, our full investment thesis and comments on the valuation and risk of the security.
Morningstar’s Manager Research
Morningstar’s Manager Research covers LICs, ETFs and Managed Funds. We provide our forward looking qualitative Morningstar Medalist Rating along with a detailed research reports. Our full analyst report includes our view of the role that the fund or ETF can play in a diversified portfolio as well as our assessment of the investment team, investment process and the various fees that investors are charged.