Wednesday, November 16, 2011

Are Morningstar Mutual Fund Analysts Taking Happy Pills? Ratings Breakdown.

UPDATE: 8/1/12 - You can see updated ratings as of 6/30/12 here.
------------------------------------------------------------------------------
So Morningstar has released new "Analyst Ratings" on 349 US based mutual funds as of 11/15/11. According to Morningstar
"The new scale runs from Gold, Silver, and Bronze on the positive end to Neutral and Negative. Expressed as medals, the top three tiers are reserved for funds our analyst team thinks have sustainable advantages that position them well versus peers and a relevant benchmark on a risk-adjusted basis over the long haul (at least the next five years)"

Morningstar considers Gold, Silver and Bronze to be positive analyst ratings. And obviously the other two are self explanatory. The exact definitions of each are below
Gold: Best-of-breed fund that distinguishes itself across the five pillars and has garnered the analysts’ highest level of conviction;  
Silver: Fund with notable advantages across several, but perhaps not all, of the five pillars—strengths that give the analysts a high level of conviction;
Bronze: Fund with advantages that outweigh any disadvantages across the five pillars, and sufficient level of analyst conviction to warrant a positive rating; 
Neutral: Fund that isn’t likely to deliver standout returns, but also isn’t likely to significantly underperform; and 
Negative: Fund that has at least one flaw likely to significantly hamper future performance, and is considered an inferior offering to its peers.
However, one has to question the way these ratings have been given out for this first batch of 349 funds. 


These must be the parents of Generation Z giving out these ratings because apparently they think you deserve a metal just for showing up. Of the first 349 funds rated, a full 311 or 89% received a "positive" rating deserving of a "metal". Another 30 they are indifferent about and they only have a negative view on 8 or about 2%. 

However, many studies have shown that the majority of actively managed mutual funds actually underperform their benchmarks. Below is a chart from Mclean Heuristics using data from Standard and Poor's Indices verses Active Funds Scorecard.

Clearly that is a sad showing for active managers as a whole. But lets get one thing clear.....I am NOT a supporter of index investing. In fact, I believe index investing (particularly using cap-weighted indexes) only adds to market inefficiency (but that's a rant for another day). 

However, what that chart does show is that if Morningstar was properly distributing it's ratings, it would likely be an inverted version of what they put out. With the majority falling in the "negative" category and the least falling in the "gold" category.

We'll see how the distribution of ratings turns out as Morningstar rolls out more over the next year, but so far it looks to be just as ridiculous as stock ratings given out by the industry. Analysts as a whole in the financial industry are not in short supply of happy pills. After all, Happy Sells!

Updated: 11/17/11 10:20pm ET

120 comments:

  1. Hello anonymous blogger: As we indicated in our press materials, because our initial focus is on the biggest and best funds, our initial coverage will skew more positively and become more balanced over time as we ramp up. It’s important to point out that under our Analyst Picks and Pans (a precursor to the Analyst Ratings), less than 3% of all funds offered in the United States qualified for an “Analyst Pick” designation. Also, some of the funds we rated are index funds, so your assertion is incorrect. As always, we’d be happy to walk you through the methodology, the performance of the Analyst Picks, or answer any questions you may have.

    ReplyDelete
  2. The very fact that you have given index funds a "Gold" rating at all is kind of the point!

    You guys say the top three tiers are reserved for funds your analyst team thinks have sustainable advantages that position them well versus peers AND A RELEVANT BENCHMARK on a risk-adjusted basis over the long haul.

    It is IMPOSSIBLE for an index fund to have a sustainable advantage over the index it is tracking!! By your own definition a cheap index fund should be given the NEUTRAL rating. In fact, it fits your definition of neutral perfectly

    "Neutral: Fund that isn’t likely to deliver standout returns, but also isn’t likely to significantly underperform"

    Not only is an index fund unlikely to deliver standout returns...it is essentially guaranteed! It also isn't likely to significantly underperform...except because of some terrible sampling method or high fees.

    The reality is by your very own definitions only funds your analysts think can BEAT their indexes on a risk-adjusted basis should receive metals...which goes towards my point....only a very select group should receive "metal" ratings at all. The rest should be neutral and negative.

    ReplyDelete
  3. Nice work on this distribution of "metals." Wall Street equity research got into trouble for the conflict of interest which led to every dog being "Market Perform." What do you suppose explains this distribution of ratings?

    ReplyDelete
  4. @Eapen Well they claim that it is because their first batch was focused on the "biggest and best funds" and say that it will "become more balanced over time" as they ramp up the number of funds rated.

    However, a realistic look at the way they have given out these "metal" ratings should leave everyone pretty skeptical of that claim. After all, their first batch included 18 index funds (12 gold, 4 Silver, 2 Bronze, 0 neutral, 0 negative). Again how can an index fund have a sustainable advantage over the index it is tracking? That's their own requirement for a metal rating......yet not only did every index fund not get neutral as their definition would imply (or lower if it had a bad sampling method) but they ALL received 'metals'!

    I can't really speculate too much on the reasoning for this bias at this point. However, there are those that point to their advertising relationships. But I have not looked deep enough into that.

    ReplyDelete
  5. Nice to see someone pointing out the weirdness of the large numbers of Gold ratings. How can so many funds be superior? On a related front, how strange is it that "Parent" is one of the "5 Pillars" of the rating scheme. It implies that the parent of a fund has an influence on its performance. It seems to be good to be a part of Fidelity or Vanguard.

    One of the other beauties of this new rating system from Morningstar's point of view is that it can be touted for years before there is any possible assessment of its reliability, Many investors never understood that the star system was not an assessment of future performance. After all, why would someone consider the ratings for any reason other than to find those funds likely to outperform?

    We need some objective rating schemes that can find funds likely to outperform,

    ReplyDelete
  6. @Anthony DuBon I agree, and while I am not against Morningstar's attempt to give a forward looking indicator (In fact the more groups that do this the better -- as long as they are not blindly accepted)....however, in Morningstar's attempt there are obvious flags that are going up from the start. I also don't think too much weight should be given to the parent company...seems a convenient way to add bias without it appearing as such.

    ReplyDelete
  7. Different diet pills work in many different ways. If it worked for other people, it doesn't mean that it will work the same for you

    ReplyDelete
  8. I would like to thank this wonderful reading for your time !!! Certainly enjoy every piece of it, and I have a marker to read new things from your blog to the blog !!!!
    Angel Investor in India

    ReplyDelete
  9. I am very happy to teach the owner of this day's guestbook, your own reaction and then put my opinion good way to save should I say it is definitely every couple of great additions to your needs.
    San Diego Movers

    ReplyDelete
  10. Well great share in this article, for either small or big businesses can definitely have better understand with this article....
    bandarq

    ReplyDelete
  11. Writing a good post is almost like an art, and a paradox; a good post should be short, but it should also be descriptive.


    bandar ceme online
    bandar ceme
    ceme
    ceme online

    ReplyDelete
  12. Good article, but it would be better if in future you can share more about this subject. Keep posting.

    agenqq dominoqq domino99

    ReplyDelete
  13. I really liked this part of the article, with a nice and interesting topics
    Agen Domino

    ReplyDelete
  14. Good post. I’d like to write like this too , taking time and real hard work to make a great article.
    Model Escorts Service Bangalore

    ReplyDelete
  15. Your post so Inspirative and good point.
    Thanks, great post. I really like your point of view!
    Bandar Ceme

    ReplyDelete
  16. This is great, you are good, i like your post and i still waiting our next post
    Bandar Ceme

    ReplyDelete
  17. I still liked this article, good, good content, and unique design.Thank you for sharing the article.

    Escorts in Chandigarh

    ReplyDelete
  18. Wow. good post. I’d like to write like this too , taking time and real hard work to make a great article. Thanks for sharing. Bonus Deposit Poker

    ReplyDelete
  19. That’s awesome! This post gives truly quality information. I love this post it very interesting and helpful for us, Thank for sharing all, Thank you so much. Poker Bonus Deposit Terbesar

    ReplyDelete
  20. Such a very useful article. Very interesting to read this article.I would like to thank you for the efforts you had made for writing this awesome article.Thanks for sharing with us.
    Escorts in Bhiwadi

    ReplyDelete
  21. Really great post.I enjoy to reading this article.There is such a true article there is more information for us .thanks for sharing this lovely post.




    Escorts in Dwarka

    ReplyDelete
  22. It is a good and amazing article. Your information is very useful for me and for others. thank you so much. BoyaQQ

    ReplyDelete
  23. This article is very good, I like this article, thanks for posting. Link Alternatif BoyaQQ

    ReplyDelete
  24. Thanks for sharing nice information with us. I really liked this part of the article, This is truly awesome article. Bonus Member Baru Poker Online

    ReplyDelete
  25. I would like to thank you for the efforts you have made in writing this article , Your article very well and good, thanks for posting. Judi Capsa

    ReplyDelete
  26. This is so interesting, I have never seen this before , Nice Post. Bandar Domino

    ReplyDelete
  27. Thanks for this wonderful post and hoping to post more of this. Bandar QQ

    ReplyDelete
  28. Thanks, guys you always provide useful information through your articles
    Agen Domino

    ReplyDelete
  29. Really a nice content i am going to bookmark your site thanks
    Domino QQ

    ReplyDelete
  30. Your blog information is nice and friendly. This post is very helpful for me. Thank for post.
    Judi Ceme

    ReplyDelete
  31. great post. I really like your point of view!
    Bandar Ceme

    ReplyDelete
  32. I need to think that one through, thanks for posting.
    Domino Qiu Qiu

    ReplyDelete
  33. This is great, you are good, i like your post and i still waiting our next post
    Bandar Ceme

    ReplyDelete
  34. Absolutely really Amazing Articel and good point in there.
    Thanks shared.
    Dominoqiu

    ReplyDelete
  35. This is impressive and also great information, This is excellent.
    Judi Domino

    ReplyDelete
  36. This is really very nice blog and so informative, I would like to thank you for all the information you give.
    Domino 99

    ReplyDelete
  37. I found your blo and I am very amazed this is very good and I immediately like. Thank you for the information that has been served

    Obat Dada Panas

    Pencegahan Secra Alami

    Gejala Dada Terasa Panas Seperti terbakar

    Penyebab Dada Serasa Terbakar

    Pengobatan Dada Terasa Panas

    ReplyDelete
  38. The information which you people are given are really good, These look really great.
    BandarQ

    ReplyDelete
  39. I am a Bangalore Escorts, but I can journey with you in a variety of meetings and parties anyplace in this world. I can have close relations in a place at your option, whether it is a hotel or your own apartment house.
    Independent Bangalore Escorts

    ReplyDelete
  40. Our beautiful ladies are mind blowing, although they are living in Bangalore, they will give out never less to any international escort. This makes you experience like you are spending your time with an global escort. 
    Bangalore Escorts

    ReplyDelete
  41. There are the broad range of the sources made accessible in the modern day market places and online to assist you go for the relaxation of your tired body and brain.
    Mumbai Escorts Service

    ReplyDelete
  42. You can be continually certain that we set up the redesigned data that can provide you a possibility to pick a rightful young lady as your assistant
    Mumbai Escorts

    ReplyDelete
  43. We proposal you tired drawer allies who have admiration for the enjoyable that the designing scene become the easiness of a genial and considerately originate incall loft. All solicitations are achieve in a practiced and good-looking system and we are repeatedly smiling to offer direction if obligatory so we can build convinced of produce your time perfect with the correct partner
    Mumbai Escorts
    Escorts in Mumbai

    ReplyDelete
  44. Most gorgeous Girls come and join this Business, for their pocket money, but as the Company is prospering in a big way, people are willing to take this as the livelihood. To be one of the VIP Escorts, you have to concentrate only on one thing, and that is the customers’ Enjoyment.
    Thane Escorts
    Juhu Escorts
    Chembur Escorts
    Nerul Escorts

    ReplyDelete
  45. These services are also agreed by our sexy girls to our patrons. You can make sure the list of services on our page of services. Our escorts have won the spirit of thousands of gentlemen.
    Andheri Escorts
    Vashi Escorts
    Thane Escorts
    Juhu Escorts
    Powai Escorts

    ReplyDelete
  46. The are associated with many customers. They brought to completion of fun moving out with people. They wholly surround themselves to clients and cuddle them strongly to forget rest of world.
    Ahmedabad Escorts
    Gandhinagar Escorts
    Vadodara Escorts
    Surat Escorts
    Nashik Escorts

    ReplyDelete
  47. All the erotic female adult entertainer of our association has a completely dissimilar move toward behind amalgamation the career of escorting. Physical enjoyment
    Nagpur Escorts
    Jamnagar Escorts
    Female Escorts Bangalore

    ReplyDelete
  48. Thank you for sharing useful and informative post. Nice post. I have enjoyed reading this post - Best packers and movers Professional packers and movers

    ReplyDelete
  49. This is really very nice blog and so informative. Thanks a lot for sharing this article.
    BandarQQ

    ReplyDelete
  50. Thanks for posting, this is really amazing.
    BandarQQ Online

    ReplyDelete
  51. Some of these information are really amazing. Thank you for giving me good information.
    Situs BandarQQ

    ReplyDelete
  52. I would like to thank you for all the information you give. information your is useful to me.
    BandarQQ Terpercaya

    ReplyDelete
  53. Your work is very good and I appreciate you and hopping for some more useful posts. movers and packers Hyderabad madhapur movers and packers Bangalore marathahalli

    ReplyDelete
  54. I learned a lot from the articles you have created that really helped me and provided many useful benefits for me
    luka gangren
    penyebab terkena gangren
    gejala penyakit gangren
    pengobatan luka gangren

    ReplyDelete
  55. This blog had an extremely strong impact on me.
    https://essaywriters.us

    ReplyDelete
  56. Packers and movers in faridabad@
    http://www.transmoving.in/packers-movers-faridabad.html
    Packers and movers in goa@
    http://www.transmoving.in/packers-movers-goa.html
    Packers and movers in indore@
    http://www.transmoving.in/packers-movers-indore.html
    Packers and movers in jaipur@
    http://www.transmoving.in/packers-movers-jaipur.html
    Packers and movers in thane@
    http://www.transmoving.in/packers-movers-thane.html
    Packers and movers in varanasi@
    http://www.transmoving.in/packers-movers-varanasi.html

    ReplyDelete
  57. This comment has been removed by the author.

    ReplyDelete
  58. This comment has been removed by the author.

    ReplyDelete
  59. This comment has been removed by the author.

    ReplyDelete
  60. This comment has been removed by the author.

    ReplyDelete
  61. Bergabung Dan Tunjukkan Cara Bermain Pokermu.
    Bersama GadisPoker Dan Menangkan Hadiah jutaan Rupiah.
    Dan Jangan Lupa Juga kami Ada Promo Buat Anda.
    https://goo.gl/iXP5pY
    Untuk Info Lebih lanjut Silakan hubungi CS (custumer Service).
    -Live chat ( gadispoker )
    -Whatsapp : +855966624192
    -BBM : D87DB681
    agen judi poker online terpercaya di indonesia

    bandar judi poker online yang paling aman

    taruhan judi poker online terpercaya

    poker online

    judi poker

    dewa poker

    raja poker

    gadispoker

    judi poker online terbesar

    judi poker online yang aman dan terpercaya

    bandar poker online indonesia

    judi dewa poker terbaik indonesia

    agen poker online indonesia

    poker online betting

    poker online terbaik

    ReplyDelete
  62. Bergabung Dan Tunjukkan Cara Bermain Pokermu.
    Bersama GadisPoker Dan Menangkan Hadiah jutaan Rupiah.
    Dan Jangan Lupa Juga kami Ada Promo Buat Anda.
    https://goo.gl/iXP5pY
    Untuk Info Lebih lanjut Silakan hubungi CS (custumer Service).
    -Live chat ( gadispoker )
    -Whatsapp : +855966624192
    -BBM : D8C893A4
    agen judi poker online terpercaya di indonesia

    bandar judi poker online yang paling aman

    taruhan judi poker online terpercaya

    poker online

    judi poker

    dewa poker

    raja poker

    gadispoker

    judi poker online terbesar

    judi poker online yang aman dan terpercaya

    bandar poker online indonesia

    judi dewa poker terbaik indonesia

    agen poker online indonesia

    poker online betting

    poker online terbaik

    ReplyDelete

  63. شركة نقل عفش
    اهم شركات مكافحة حشرات بالخبر كذلك معرض اهم شركة مكافحة حشرات بالدمام والخبر والجبيل والخبر والاحساء والقطيف كذلك شركة رش حشرات بالدمام ومكافحة الحشرات بالخبر
    شركة مكافحة حشرات بالدمام

    ReplyDelete
  64. شركة تنظيف خزانات بجدة الجوهرة من افضل شركات تنظيف الخزانات بجدة حيث ان تنظيف خزانات بجدة يحتاج الى مهارة فى كيفية غسيل وتنظيف الخزانات الكبيرة والصغيرة بجدة على ايدى متخصصين فى تنظيف الخزانات بجدة
    شركة تنظيف خزانات بجدة
    شركة كشف تسربات المياه بالدمام
    شركة نقل عفش واثاث

    ReplyDelete
  65. شركة نقل عفش بالرياض وجدة والدمام والخبر والجبيل اولقطيف والاحساء والرياض وجدة ومكة المدينة المنورة والخرج والطائف وخميس مشيط وبجدة افضل شركة نقل عفش بجدة نعرضها مجموعة الفا لنقل العفش بمكة والخرج والقصيم والطائف وتبوك وخميس مشيط ونجران وجيزان وبريدة والمدينة المنورة وينبع افضل شركات نقل الاثاث بالجبيل والطائف وخميس مشيط وبريدة وعنيزو وابها ونجران المدينة وينبع تبوك والقصيم الخرج حفر الباطن والظهران
    شركة نقل عفش بجدة
    شركة نقل عفش بالمدينة المنورة
    شركة نقل اثاث بالرياض

    ReplyDelete
  66. This blog is so nice to me. I will continue to come here again and again. Visit my link as well. Good luck
    obat aborsi
    cara menggugurkan kandungan
    obat penggugur kandungan
    obat telat datang bulan

    ReplyDelete
  67. Welcome to High Class Rajkot Escorts Agency, the luxurious Rajkot Escort Agency where you can find the most beautiful Escorts girls in Rajkot.

    Rajkot Escorts, Rajkot Call Girl

    Call Girl in Rajkot, Rajkot Escorts

    Rajkot Escorts, Rajkot Escort Service

    Rajkot Escorts Service, Rajkot Escort

    Rajkot Escorts Service, Rajkot Escorts

    Rajkot escorts service become your girlfriend after that you imagine that which type of fun you find with her because any anyone pass time with her girlfriend that is best moment of life..

    ReplyDelete