Morningstar improves the Medalist Rating methodology to improve the evaluation of investment tools
17 SEPT, 2024
Morningstar has announced its plan to improve the methodology of the Morningstar Medalist Rating, its prospective global rating system for managed investments.
The Morningstar Medalist Rating is a five-level system designed to assess the potential of an investment strategy to outperform an index or peer group over the long term. Ratings are awarded on a scale ranging from Gold to Negative and are based on an analysis of the added value that a managed investment can provide against its benchmark index, after fees, and on the three key pillars: People, Process, and Parent (Manager), which determine Morningstar's conviction in a specific investment strategy.
The improvement, which will take effect on October 29, 2024, refines Morningstar's framework for projecting future returns, while maintaining the same rating assignment process. Using historical data, the updated framework introduces a more accurate assessment of the added value that a managed investment can generate before fees, compared to its assigned benchmark index. This assessment, called the Alpha Potential Estimate, is a key component within the Medalist Rating framework. Morningstar anticipates that this update will affect approximately 20% of the Medalist-rated investment vehicles, most with downgrades due to a reduction in the Alpha Potential Estimate.
Morningstar is also refining the algorithm that evaluates the Process pillar of passively managed equity vehicles that are not covered by an analyst. The new approach will employ a rule-based system that will better align with the way Morningstar Manager Research analysts evaluate this pillar for these types of investments.
With the wide range of investment products available today, Morningstar ratings guide investors towards more informed decisions. Our Medalist Rating has played a crucial role in ranking funds based on their future performance, and this improvement is an opportunity to consolidate this strength and provide greater confidence and autonomy to investors.
Jeff Ptak, Chief Ratings Officer of Morningstar
