Morningstar - Q2 2023 - 48

252
Strategies
400
300
100
EXHIBIT 2
when reported returns reflect actual results,
model providers have few incentives to voluntarily
report models with poor performance. So,
the possibility of managers only reporting flattering
results rather than their entire record, warts
and all, can lead to selection bias.
To ensure the integrity of the MQR, models
must meet additional criteria to qualify for a rating.
These requirements are similar to those for
the Morningstar Rating for models, commonly
known as the star rating.
Firms need to be compliant with the Global
Investment Performance Standards or
have a minimum of $10 billion in registered
products, such as mutual funds or ETFs.
A maximum of 18 months of preactivation
performance is used to calculate the rating. To
receive a Silver or Gold rating, models must
have at least 18 months of postactivation returns.
For most models, fees start with the prospective
acquired fund fees, which is an asset-weighted
calculation of the underlying funds' and
ETFs' prospectus adjusted expense ratio. For firms
that don't report a strategist fee or use single
securities instead of funds, we add a proxy fee
of 0.35% for models in allocation categories.
For other categories, the proxy fee ranges from
0.25% to 0.45%.
How the Ratings Shake Out
The initial distribution of MQRs skews more
negatively than Analyst Ratings, but that's
to be expected ( EXHIBIT 2 ).
The MQR for models has identified far
more Neutral- and Negative-rated portfolios than
Morningstar analysts, which is due to selection
bias on the part of the analysts. Because we can't
cover everything, we tend to focus our efforts
on more-established model providers that have
gained interest from advisors, like BlackRock,
Vanguard, and American Funds. MQR doesn't have
the same capacity limitations as analysts,
leading to a much wider breadth of coverage.
Another indication that MQR tilts more negatively
than the Analyst Rating is the Quantitative
48
Morningstar Q2 2023
More Neutral and Negative Ratings The distribution of Quantitative Ratings skews
more negatively than the Analyst Ratings, which is to be expected.
200
100
600
600
300
2019
2020
2021
2022
Distribution of Ratings for Model Portfolios
2019
65
2020
2021
577
400
600
200
400
79
15
47
52
Source: Morningstar Direct. Data as of Dec. 31, 2022.
200
EXHIBIT 3
Worse People Ratings MQR identifies far more model portfolios with Below
Average and Low People Pillar ratings than does the Analyst Rating.
400
Distribution of Ratings for Model Portfolios
210
200
300
400
131
100
200
300
100
15
High
People Pillar Ratings
131
15
High
Above Average
People Pillar Ratings
Source: Morningstar Direct. Data as of Dec. 31, 2022.
Average
Above Average
190
210
222
Average
190
377
25
333
Below Average
25
Below Average
Low
Low
192
Quantitative
Rating
Œ „ ´ ˇ Á
333
377
222
192
79
15
47
52
103
103
198
228
577
15
Œ „ ´ ˇ Á
198
228
15
Analyst
Rating
Quantitative
Rating
Analyst
Rating
386
386
2022
Analyst
Rating
Quantitative
Rating
Analyst
Rating
Quantitative
Rating
Launches
Activations
331
200
1,200
600
900
300
320
252
272
65
Launches
Activations
331
People Pillar ratings. This rating is comparable
to Morningstar's People Pillar rating,
which provides Morningstar analysts' opinions
on the fund manager's talent, tenure, and
resources. Again, the quant model identifies far
more model portfolios with Below Average
and Low parent ratings than does the Analyst
Rating ( EXHIBIT 3 ).
New Tool
The proliferation of model portfolios gives
investors more choices than ever, but it
complicates the research process. Morningstar's
new Quantitative Ratings should help advisors
comb through this increasingly important
area of the investing universe to give their clients
the best possible models. K
.
Jason Kephart, CFA, is director of multi-asset ratings at
Morningstar Research Services LLC.
Lidia Breen, a product manager at Morningstar, contributed
to this article.
https://www.morningstar.com/authors/1806/jason-kephart
Morningstar - Q2 2023

Table of Contents for the Digital Edition of Morningstar - Q2 2023
