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In May 2023, the Morningstar Medalist RatingTM will combine the Morningstar Analyst Rating and the Morningstar Quantitative Rating into one encompassing forward-looking rating.
All investors and practitioners across Morningstar’s ecosystem can expect immediate benefits. Most importantly, the Morningstar Medalist Rating will simplify strategy search, selection, and workflow monitoring on a far broader universe of investments.
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Morningstar has conducted research on active and passive investment strategies and their associated vehicles since 1986. Since November 2011, Morningstar analysts have assigned the Morningstar Analyst RatingTM to funds based on their qualitative evaluation.
In 2017, Morningstar expanded its manager research with the Morningstar Quantitative RatingTM for funds, which used algorithmic techniques and inheritance logic to rate strategies and vehicles that Morningstar analysts didn’t cover. The Quantitative Rating was designed to mimic analyst decision-making as much as possible.
In May 2023, the Morningstar Medalist Rating will bring the best thinking across our qualitative and quantitative research into one view. The methodology remains unchanged. The rating will assess each strategy’s ability to outperform its Morningstar Category index after fees.
In summary, the Morningstar Medalist Rating will be the full, final expression of Morningstar’s forward-looking view on all rated strategies.
With the Morningstar Medalist Rating, investors can rely on a more simplified, expansive rating system for strategy due diligence.
Investors are faced with more choices than ever before. And the options aren’t expected to stagnate or dwindle. Over the past 20 years, the number of managed products has grown steadily at 11% per year. On average, approximately 3,000 new share classes were incepted each month. At the end of 2022, Morningstar databases contained over 750,000 live investment vehicles globally.
Morningstar has one of the largest manager research teams in the world, with over 150 analysts conducting qualitative due diligence. However, even a staff this large can’t keep pace with the growing managed investment universe. The Analyst Rating coverage universe currently sits at 21,400 vehicles globally. The Quantitative Rating, on the other hand, now covers 383,000 vehicles globally.
By bringing these two rating systems together, investors can search, screen, and monitor strategies with a simpler, more straightforward workflow.
The methodology underpinning the Quantitative Rating has always replicated the analyst decision-making process as closely as possible. Whenever we have an analyst opinion on a strategy, we default to that view. We never publish multiple views.
Increasingly, we have been able to leverage inheritance logic to extend analyst views to a wider investment universe. In this context, inheritance refers to relationships between strategies where we believe an analyst's decision on one fund can port over (or be inherited) by another fund.
The most obvious example is our Parent ratings. When a Morningstar analyst rates a Parent, we port over that decision to all strategies offered by that Parent. Similar rules and logic exist to extend analyst decisions across the People and Process Pillars as well.
Today, the Morningstar Quantitative Rating inherits about 55% of its pillar ratings directly from analysts. Approximately 42% of all quantitatively rated strategies system inherit all three pillars from analysts, and 72% of strategies inherit at least one pillar. In essence, the Quantitative Rating is already a hybrid system between analyst and algorithmic inputs.
In reality, two segregated forward-looking rating systems make it more difficult to navigate our software and reports. If an investor wants to screen for Morningstar’s best ideas, for example, they must juggle multiple signals and methodologies. With this merger, we expect strategy due diligence workflows to be much simpler and more intuitive.
We see very similar efficacy between the Analyst Rating and Quantitative Rating. Both rating systems have shown an ability to identify outperforming funds over the long term. In general, the ratings sort forward excess returns in a consistently monotonic fashion across time.
In the five-year period ending September 2022, strategies with Analyst Ratings of Gold had an average excess return of 0.23%. Similarly, strategies with Quantitative Ratings of Gold have averaged 0.79%. Negative-rated strategies, on the other hand, have shown excess returns of negative 0.44% and negative 0.40% for Analyst Ratings and Quantitative Ratings, respectively.
While the Analyst Rating has a longer track record than the Quantitative Rating, both systems have a substantial sample on which to base conclusions. Since their respective launches in 2011 and 2017, the Analyst Rating and Quantitative Rating have issued approximately 2 million and 10 million ratings.
Putting this all together, we observe great alpha sorting on a large sample of strategies over a reasonably long period with multiple market cycles in between. As such, we have a high degree of confidence that these systems can be relied upon to deliver better outcomes to investors, especially when brought together.
The launch of the Morningstar Medalist Rating won’t coincide with any change in methodology. We don’t expect any upgrades or downgrades for either ratings system due to this release.
The primary change will be how our platforms display the ratings. The data point names will change from Morningstar Analyst Rating and Morningstar Quantitative Rating to Morningstar Medalist Rating.
Additionally, the superscript “Q” will be removed from the overall rating levels—Gold, Silver, Bronze, Neutral, and Negative—for all strategies currently rated by the Morningstar Quantitative Rating. Morningstar will retain the superscript “Q” at the pillar level when we used an algorithmic technique to assign that pillar rating. In these cases, the byline will read: Autogenerated by Morningstar Manager Research.
Finally, two new data points will provide additional transparency on how we derived ratings. The first, “Analyst Assigned %,” will denote the extent of analyst involvement in assigning individual pillar ratings. The second, “Data Availability %,” will denote the extent of underlying data-input availability for the algorithmic approach to pillar ratings at the time of the rating assignment. Both will be available for all rated vehicles.
The Morningstar Medalist Rating will further simplify and harmonize how we display our ratings, keeping our analyst views at the center while taking full advantage of the scale benefits from the Quantitative Rating. The result is a far more straightforward rating system to power strategy search, selection, and workflow monitoring.