Morningstar Rating Methodology
Key Benefits Background research – the Morningstar Rating – reduces complexity,
3 The Morningstar Rating is
Morningstar has been publishing star ratings for and introduces greater transparency into the intellectual
highly-proficient at assessing a
fund manager’s ability to provide managed funds in Australia since 1999. Using an property Morningstar provides for assessing past
added value for investors. easily-identifiable scale from one to five stars, performance and future prospects. This also increases
3 Separation of quantitative Morningstar Ratings have helped investors and their
™
the universe of funds with Morningstar Ratings, giving
research (Morningstar
Rating) from qualitative advisers make more fully-informed decisions about fund greater numbers of investors convenient snapshots of
research (Morningstar Analyst managers and their funds, and build and manage better their funds’ track records.
Rating) reduces complexity investment portfolios.
and introduces greater
transparency to
Qualitative Research
fund assessment. Morningstar Ratings for Australian funds are based on The Morningstar Analyst Rating – from ‘Gold’
3 The Morningstar Analyst a risk-adjusted return quantitative measure, in line with to ‘Negative’ – provides a clear and actionable
Rating provides a clear,
Morningstar’s global ratings methodology. Morningstar’s distillation of our fund analysts’ views about an
actionable distillation of
fund analysts’ views about qualitative research is separate from the star ratings, investment strategy.
an investment strategy. and incorporated exclusively in the Morningstar Analyst
Rating . Morningstar Ratings are calculated within
™
The accompanying report and commentaries focus
fundamentally-based fund categories, enabling more on key issues and risks, while extensive, regularly-
robust peer comparisons. updated holdings, valuation multiples, and performance
data offer meaningful insights into current and future
What It Means for You performance drivers and outcomes. Readers will
The key benefit is that this model is highly-proficient understand how a fund manager’s philosophy and
at assessing a fund manager’s ability to provide added process translate into security selection, and whether or
value for investors. The Morningstar Rating is a pure not the fund manager is staying true to label.
measure of a fund’s delivery of risk-adjusted returns to
investors over the last three, five, and 10 years. Quantitative Research
Morningstar Ratings are based on a fund’s Morningstar
While Morningstar Ratings are solely quantitative Risk-Adjusted Return (‘MRAR’) measure, the foundation
measures, our commitment to forward-looking of our global quantitative research since 2002.
qualitative research remains, as we believe this is
critical to helping investors and advisers make informed MRAR is motivated by ‘expected utility’ theory, whereby
decisions about fund managers’ capabilities. an investor ranks alternative portfolios using the
mathematical expectation of a function (called the
The separation of qualitative research – in the form ‘utility’ function) of the end value of each portfolio.
of the Morningstar Analyst Rating – from quantitative With this basis in expected utility theory, investors are
How Does the Morningstar Rating Work?
3-year MRAR 3-year Morningstar Rating 20%
5-year MRAR 5-year Morningstar Rating 30%
10-year MRAR 10-year Morningstar Rating 50%
Morningstar Rating Methodology TM
Key Benefits firstly, more concerned about a possible poor outcome Morningstar Categories
3 The 50:30:20 10-/five-/three-
than an unexpectedly good outcome; and secondly, A fund’s Morningstar Rating is also relative to the MRAR
year Morningstar Risk-Adjusted
Return measure rewards willing to give up some portion of their expected return measures of other funds in the same peer group. This
consistent good performance in exchange for greater certainty of return. makes it even more important that peer groups are
over an extended timeframe, constructed appropriately.
and is less subject to short-term
performance variations. Morningstar Rating
3 Fundamental, holdings-based So how does it work? Morningstar calculates each fund’s Morningstar Categories are therefore built to create
Morningstar Categories enable three-, five-, and 10-year MRAR measures, compared well-defined groups, in which constituent funds can
more robust peer comparisons,
and help investors and advisers
with the risk-free rate as measured by the Australian be considered direct alternatives. These Morningstar
select and combine funds in 90-Day Bank Bill Accepted Rate, provided there are Categories are based on our global Style Box model,
ways more likely to translate enough monthly returns for these periods (36, 60, and which classifies funds according to the market-cap and
into true portfolio diversification.
120 month-ends, respectively). investment style of the securities in which funds invest.
A fund’s overall Morningstar Rating is a 50:30:20 Grouping similar-style funds together in discrete
combination of 10-, five- and three-year Morningstar Morningstar Categories ensures investment styles are
Ratings, drawn from the MRAR measures for these treated equally, and helps investors and advisers select
periods. When a fund does not have a 10-year track and combine funds in ways more likely to translate into
record but does have enough history for a five-year true portfolio diversification.
rating, we apply a 60:40 split on the five- and three-
year Morningstar Ratings. For a fund with only three More Information
years worth of history, the overall Morningstar Rating Contact Morningstar Client Services on +61 2 9276 4446
is based entirely on the three-year Rating. These mixes or email helpdesk.au@morningstar.com
reward consistent good performance over an extended
timeframe, and are less subject to short-term variations
in fund performance.
RatingMethodology_1111
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the extent that any of this information constitutes advice, it is general advice and has been prepared by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 and/or Morningstar Research Limited (subsidiaries of Morningstar, Inc.) without
reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant Product Disclosure Statement (in respect of Australian products) or Investment Statement (in respect of New
Zealand products) before making any decision to invest. Neither Morningstar, nor Morningstar’s subsidiaries, nor Morningstar’s employees can provide you with personalised financial advice. To obtain advice tailored to your particular circumstances,
please contact a professional financial adviser. Please refer to our Financial Services Guide (FSG) for more information www.morningstar.com.au/fsg.asp
