Monday, March 2, 2009

WSJ: Morningstar Revamps its Fund Ratings

An article in the February 24, 2009 issue of the Wall Street Journal reports that investment-research firm Morningstar Inc. has announced it will change the way its analysts look at mutual funds. According to Morningstar's Managing Director, Don Phillips, the firm's analysts will take a step back in looking at funds, and consider things like asset allocation research prepared by Morningstar's affilated investment manager, Ibbotson Associates. For instance, taking a look at which funds might better suit particular portfolios and which funds might overlap with existing holdings. According to the article, Don Phillips characterised the change in approach as: ". . . a bigger picture, top-down approach to go along with the bottom-up work we've traditionally done," taking into account input from financial advisers. "Financial advisers are in the trenches and know what investors want," Phillips said. This includes a look an in-depth look at a company, covering things not routinely examined, such as what insiders call a stock's "economic moat," or how well the company defends against competitors and rivals.

The article also reports that the changes in Morningstar fund ratings "will be to provide more institutional-style analysis. 'We're going to take institutional-levle insights and creat streamlined offerings for retail investors,' [Phllips] said."

According to Mr. Phillips, the point of this change to Morningstar's approach is a new risk foced "look at a fund portfolio through the eyes of a fund manager. We want to do all we can to tear a portfolio apart and understand its risk."

The full text of the Wall Street Journal's article can be found at: