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Morningstar Provides Money Help With New Forward Looking Rating System

March 03, 2012 | Comments: 0 | Views: 98

To provide money help to investors, Morningstar released a new forward looking rating system for mutual funds. This system is a complete departure from the current backward looking star rating system. The star ratings look at how a fund performed over the long haul on a risk-adjusted basis versus its peers and is largely based on quantitative measures whereas the new system has mostly qualitative elements. This new rating system will provide mutual funds with scores of gold, silver, bronze, neutral or negative. The analyst's assessment of a mutual fund's strengths and weaknesses is based on five key pillars. These pillars are people, process, parent, performance and price.

The people and process pillars involve reviewing a fund's investment team and its experience, in addition to the rigor of its investment strategy. A process Morningstar views favorably is when a mutual fund identifies fast-growing companies by focusing on unit sales rather than overall revenue.

The parent company rating is based on whether the management team looks out for its shareholders. Morningstar likes when a company closes a mutual fund before it grows too large and avoids trouble with the SEC.

The price pillar is driven by costs since costs remain the best predictor of future performance. The lower the fund's fees, the more return you get to keep.

Lastly, the performance pillar involves analyzing the fund's returns with an emphasis on the long run.

To date, Morningstar has rated 447 funds of which 30% have been awarded gold ratings. Though this appears like an unusually high percentage receiving favorable ratings, Morningstar claims this percentage will decline as more funds are reviewed since the analysts started with some of the bigger, better known funds that have been more successful. Morningstar plans on having about 1,500 funds reviewed under the new rating system by the end of 2012.

To help decide where to put your money using this new rating system, you should view gold funds as those that should really perform well over the long term, but it does not necessarily mean they are "buy" rated funds. It is up to you to determine if the timing is suitable to buy the funds. The gold rating just means that based on the five pillars, the funds have a strong chance of being solid outperformers.

The silver and bronze funds also have a very good chance of being strong performers, but there is some element that prevents them from a gold rating such as a high price or an inexperienced management team. The neutral funds are viewed as not having a clear advantage or disadvantage and negative funds have a definite disadvantage that will impede their ability to outperform in the future.

When you are evaluating a mutual fund using this new Morningstar rating system, it is important to know why the fund has the rating it does. Just because a fund has a silver or bronze rating does not mean it is not worthy of further consideration especially if the reason it is not rated gold is fairly minor.

For additional money help on how to evaluate a mutual fund, join the Money and Savings Help group at

ABOUT: Kelli Bhattacharjee has over 8 years experience in the investment and financial services industry. Today she is proud to be her family's CFO and offer her expertise and experiences to her readers. She is the Founder of, which strives to provide valuable money and savings help to other family CFOs.

Source: EzineArticles
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