Surprisingly, Michael Phelps only placed third in one of last week’s Olympic trials. Will you be just as shocked if your plan’s mutual funds don’t end up rating a gold or silver with Morningstar’s new forward-looking mutual fund ratings?
Morningstar is moving to a new rating scale that is sure to have a significant impact on the mutual fund world. Instead of the 1 to 5 star rating that Morningstar has used for many years to rate the past performance of mutual funds against their peers, they will now be rating mutual funds with a gold, silver, bronze, neutral, or negative rating scale by measuring funds against these five forward-looking criteria they call “pillars” since they all start with the letter “p”:
Process – Does the fund manager have a strategy that gives it a competitive advantage that can be executed as a process well and consistently over time?
Performance- Has the fund earned its keep with strong risk-adjusted returns over relevant time periods?
People – What is the assessment of the fund manager’s talent, tenure, and resources?
Parent – What priorities prevail at the mutual fund, stewardship or salesmanship?
Price – Is the fund a good value compared with costs at similar funds sold through similar channels?
Educating your employees on this new rating system is essential since sometimes these new forward-looking ratings will produce big differences from the current backward-looking star system. So far, Morningstar has only rated about 700 mutual funds but hopes to use the new rating system on at least another 1,500 funds by the end of this year.
