The fund industry boasts a diverse offering of active, passive, long, short, leveraged, and thematic funds. While new fund launches have decreased recently, there continue to be unique options.
At Morningstar, our Portfolio X-Ray tool can assist in this effort and ensure your portfolio has enough diversification.
Risk-adjusted performance
Morningstar is a premier mutual fund rating and research firm. Their ratings are intended to be objective, using mathematical evaluation of past performance; however, Morningstar cautions that its rankings only serve as snapshots of risk-adjusted performance at one particular moment – so they should not be used solely when choosing funds.
Morningstar Risk Rating for mutual funds and exchange-traded funds (ETFs) provides an assessment of each fund relative to its peers by using an approach similar to standard deviation but placing greater weight on downward deviations than on lighter gains due to investors being more concerned with heavy losses than smaller gains. Additionally, Morningstar categorizes each fund based on the risk rating subtracted from its return and places it into one of five categories such as Cyclicals; Basic Materials; Financial Services; Defensive; Utilities, or communication services.
Morningstar compares funds into four groups when assessing them: domestic equity, international equity, taxable bond, and municipal bond. Their proprietary methodology uses peer group determination to match capital markets in each country. Still, it fails to consider relative size differences within each category, which are vital when assessing market shares of funds.
Each fund is then ranked according to its RARs, with those in the top 10% receiving five stars (or Category Rating of 5), those in the next 22.5% getting four stars, those between 35%-37% three stars, and those in the bottom 10% getting one star. Morningstar’s RAR calculation does not consider market trends when ranking funds, making it less volatile than an excess-return Sharpe Ratio calculation.
Morningstar rankings remain widely used by investors as a guide in selecting suitable funds for their portfolios, with research showing up to 90% of new money invested going toward funds with high Morningstar ratings; furthermore, Morningstar ratings can have a tremendous influence over monthly flows into funds due to investors chasing ratings; this phenomenon is known as non-fundamental correlated demand.
Fees
Morningstar fee analysis is invaluable for analyzing the costs of investing in mutual funds, helping investors select suitable funds for their portfolios, and assessing costs associated with investing. Unfortunately, however, its research does have some drawbacks, specifically not taking into account all the fees related to funds, such as transaction costs (which can be considerable) and not accounting for management fees associated with active funds versus passive ones – both can have differing expenses related to management fees that need to be factored in.
Morningstar provides investors, financial advisors, investment managers, retirement plan providers and sponsors, institutional investors in debt and private capital markets as well as retirement plan sponsors with ratings, data, and tools for individual investments, financial advisors, investment managers, retirement plan sponsors/providers/sponsors as well as institutional investors in both debt and private capital markets. Morningstar operates through wholly owned subsidiaries in North America, Europe, Australia, and Asia to offer managed investment products, global market information services, proprietary research on stocks, mutual funds, ETFs, close-end funds, etc.
Investors have become more engaged with environmental, social, and governance (ESG) investing over time; ESG funds now account for about 11% of total fund industry assets. Yet many investors remain unaware of any fees associated with ESG funds; fortunately, the average ESG fund expense ratio has significantly reduced since 2022.
Morningstar Fee Studies can assist investors in evaluating fund costs by comparing the average asset-weighted fees of various funds against those in their peer groups and understanding differences between active and passive funds. They may also use prebuilt datasets in Analytics Lab to analyze short- and long-term trends in fund fees.
Morningstar’s research of fund fees includes expense ratios, sales commissions, and one-time fees paid directly to salespeople who sell the fund; investors may avoid these fees by purchasing mutual funds directly from fund companies or via no-transaction-fee networks.
An investment subscription service such as Morningstar may be worthwhile if you’re an active investor; however, for newcomers just beginning their portfolio development, it might not justify its cost. NerdWallet suggests considering your expected return before paying for a subscription service like Morningstar.
Research
Morningstar Research is an independent investment research firm offering investors access to various tools and data. Their analysis covers stocks, mutual funds, exchange-traded funds (ETFs), structured products, and investor education resources and tools.
Researchers at NerdWallet focus their research on fund fundamentals and market trends. They offer an extensive database of fund flows for investors to use when assessing how market forces impact performance or making buy/sell decisions that could potentially damage returns. It provides an invaluable service for anyone seeking an in-depth understanding of investor behavior through understanding underlying forces that drive market movements.
Morningstar provides investors in-depth research on stocks, mutual funds, and ETFs via free trials and low-cost membership plans. Morningstar also includes information about fees, performance metrics, and risk-adjusted returns and analyzes fund manager strategies as part of its research services.
Morningstar employs a formula for assigning its star ratings that consider past performance and costs, considering returns and risk-adjusted trailing returns, to give either Gold, Silver, Bronze, Neutral, or Negative ratings accordingly. Unfortunately, this system can have drawbacks; funds that receive five-star ratings may outshine their peers and industry averages, providing short-term gains while failing to deliver sustained superior long-term returns.
Morningstar research is invaluable for investors creating their portfolios. Their ratings, insights, and expertise give investors confidence to make informed investment decisions and correctly allocate assets.
Morningstar provides comprehensive research coverage across equity, fund, and credit research – offering individual security content and downloadable reports from analyst experts in each discipline. In addition, Morningstar provides tools that enable investors to create personalized homepages featuring tailored analysis and news updates.
Investors can leverage the Morningstar Portfolio Advisor to analyze their holdings, manage risks and track investments. It allows users to create custom portfolios that automatically track price changes, yield, and diversification; desktop and mobile versions are available.
Analyst insights and picks
Morningstar provides a premium research service that offers insights and picks on mutual funds, stocks, and ETFs and commentary on industry news, investing trends, and portfolio planning. Morningstar Investor is an ideal complement to research provided by brokerage firms, though its research may not fully replace them.
The company’s analysts rely on interviews with fund managers and proprietary data to develop ratings of Gold, Silver, or Bronze funds, depending on market cycles. Higher ratings indicate more optimism that an outperforming fund will beat its benchmark over a market cycle; lower ones, such as Neutral or Negative, indicate less certainty. In addition to these qualitative methodologies, QuantiFi uses quantitative models that predict alpha returns above the benchmark after accounting for risks – further contributing to rating decisions.
Morningstar provides comprehensive equity research by market sector, making it easier for investors and analysts to compare stocks with a similar focus. Sectors include cyclical, basic materials, financial services, defensive utilities, communication services energy technology. Furthermore, Morningstar provides insight into international investing as well as fixed-income investing.
Star ratings provide a good way of assessing past fund performance; however, they’re unreliable predictors of future returns. Investors should conduct their due diligence and research before making investment decisions; simply trusting Morningstar ratings can lead to costly errors like overestimating how healthy funds will perform over time.
Morningstar Investor is a subscription-based service offering research on stocks, mutual funds, and exchange-traded funds (ETFs). Available to both individuals and institutions alike, its price point for individuals starts at $249 annually ($199 for NerdWallet readers) with access to over 1,700 mutual fund analyses as well as weekly market updates and commentary provided by Morningstar – though this research should not be seen as an offer to buy or sell securities.
