Morningstar Advisor - August/September 2011 - (Page 22)
Morningstar Introduces New Mutual Fund Ratings
Morningstar will introduce analyst-driven global fund ratings and a uniform approach for global fund research reports in the fourth quarter. The ratings and reports will be based on analysts’ convictions about a fund’s ability to outperform its peer group and relevant benchmark on a risk-adjusted basis over the long term. The new Morningstar Analyst Rating for funds is based on forward-looking analyst research, whereas the well-known Morningstar Rating for funds—the star rating—is a purely quantitative, backward-looking measure that rates historical performance based on risk- and cost-adjusted returns without any input from Morningstar’s analysts. The new Analyst Rating will not replace the star ratings, and the existing star rating methodology will not change. Morningstar considers the new Analyst Rating to be an “aptitude test” that is intended to supplement the star rating, which is an “achievement test.” The new ratings and research reports will replace the Analyst Picks and Pans. The new rating will be assigned as one of five ratings—AAA, AA, A, Neutral, or Negative. Analysts arrive at a rating through an evaluation of five key pillars that Morningstar believes are crucial to predicting the future success of a fund: People, Process, Parent, Performance, and Price. If a fund receives a positive rating of AAA, AA, or A, it means that Morningstar analysts think highly of the fund and expect it to outperform its peer group and relevant benchmark on a risk-adjusted basis over a full market cycle of at least five years. The ratings scale is as follows: r AAA: Best-of-breed fund that distinguishes itself across the five pillars and has garnered the analysts’ highest level of conviction.
r AA: Fund with notable advantages across several, but perhaps not all, of the five pillars—strengths that give the analysts a high level of conviction. r A: Fund with advantages that outweigh any disadvantages across the five pillars, with sufficient level of analyst conviction to warrant a positive rating. r Neutral: Fund that isn’t likely to deliver standout returns but also isn’t likely to significantly underperform. r Negative: Fund that has at least one flaw that is likely to significantly hamper future performance and is considered an inferior offering to its peers.
sheets are reflected in its aggregate debt/ equity ratio. The fund invests 75% of assets in firms that pay dividends, too, a requirement that reinforces the portfolio’s tilt toward financial strength. But the large-blend vehicle’s quality bias has dragged on performance during the risk-led rally. The fund delivered middling relative returns in 2009, sank to the large-blend category’s bottom decile in 2010, and has so far turned in a subpar 2011 as well. Zimmerman says that quality’s lackluster showing may present an opportunity. “Given the rapid rise of riskier fare,” he says, “now may well be an excellent opportunity to have your quality cake and eat it, too.”
High Quality, Low Rewards
During the stock-market rally that’s been under way for more than two years, “quality” has been a performance detractor, according to mutual fund analyst Shannon Zimmerman. Bridgeway Blue Chip 35 Index BRLIX, for example, has been an underachiever the past two years. The large-blend fund holds 37 companies, and according to Morningstar equity research, all but one boast economic moats. Thirty of its holdings receive Morningstar Financial Health Grades of B or higher, too. Yet the fund fell a bit below the category’s midway point in 2009, finished near the bottom decile in 2010, and has remained there thus far in 2011. This certainly isn’t a phenomenon that’s unique to Bridgeway, and the shop’s latest shareholder report sums up the widespread dynamic succinctly: For an unusually lengthy stretch, many companies’ superior economic performance and fundamental strength simply haven’t led to superior stock-price appreciation. Parnassus Equity Income PRBLX is struggling through a similar set of circumstances. The fund’s socially screened lineup mainly comprises companies whose healthy balance
Dividend Funds That Live Up to Their Names
Mutual fund analyst Greg Carlson tracked down several stock funds with a consistent record of paying above-average dividends that also have experienced skippers and solid track records: Vanguard Equity-Income VEIPX This large-value fund recently had a healthy 12-month payout of 2.44% and a one-month yield of 2.72%. It doesn’t attempt to boost its yield by holding distressed companies. Michael Reckmeyer of Wellington Management (who runs 60% of the fund) and Vanguard’s quantitative investing group (which manages the rest) typically stick with companies that have solid balance sheets and generate plenty of cash. It has been a winner over the short and long haul, and its low 0.31% expense ratio lets more of its holdings’ dividends flow through to shareholders. Allianz NFJ Dividend Value PEIDX Much like the Vanguard fund, this one focuses on cheap dividend payers. The management team here also favors financially sturdy companies, as evidenced by the portfolio’s below-average debt/market-capitalization ratio.
22 Morningstar Advisor August/September 2011
Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2011
Morningstar Advisor - August/September 2011
Letter From the Editor
Simplicity and Design Matter
Do You Use ETFs Strategically or Tactically?
The Institutional Way
How to Analyze an ETF
Eyeing ETFs’ Next Chapter
Four Picks for the Present
Morningstar Investment Conference
Pitfalls of Peer Groups
A REIT Recovery, With a Catch
Turning Fund Distribution on Its Head
Here Come ETF Managed Portfolios
Circle These Picks Amid the Crop of New ETFs
ETF Analyst Favorites
Beware, the Accidental Portfolio Manager
It’s the Destination, Not the Vehicle
New Growth, Rooted in Experience
Better Ways to Look at ETFs
How to Better Manage Your Clients’ Future(s)
More Bargain Than Bubble
Cheap, Local, and On a Roll
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
First-Quarter Assets Hit an All-Time High
You Say You Want a Revolution?
Morningstar Advisor - August/September 2011