Morningstar goes horizontal

MORNINGSTAR has been the first research house to respond to fund managers’ demands for more cross-sector reviews.

Last week, Morningstar announced that it will enhance its qualitative ratings process to increase effectiveness and efficiency by switching from a vertical, ‘top down’ analysis of a company’s business and funds to a horizontal approach across companies and funds.

Morningstar head of research Daisy Chee said that, with the new approach, all fund managers offering products in a particular asset class would be assessed at the same time.

She said this would improve the comparability, timeliness and currency of Morningstar’s qualitative ratings and commentaries.

“We’ll be consolidating the essence of our five current underlying qualitative components into two enhanced components,” Ms Chee said.

“This will make our qualitative ratings accessible, understandable and easier to communicate.

“The Business and Management Strength Rating Component will look in depth at companies’ commercial strengths and the quality of their management processes.

“The Sector Strength Rating Component will examine fund managers’ relative competencies in asset classes like Australian shares, international fixed interest and so forth.”

She said the changes were geared to provide benefits to investors and financial advisers.

“We’ll substantially increase our coverage of the market, while maintaining the standard and integrity of the detailed research, which underlies our ratings and commentaries,” Ms Chee said.

“Each fund manager will have an equal opportunity to be rated every year if it offers funds in the major asset classes.”

Morningstar joint acting managing director Bevin Desmond said extending the range and number of funds rated would help investors make better comparisons and more thorough research.

Morningstar has rated 2,000 managed funds for more than 22 fund managers since launching the ratings system into Australia four years ago.

And the ratings system used by Morningstar appears to be getting noticed, with a recent survey of fund managers indicating they were, without exception, happy with the transparency of Morningstar’s methodology.

The recent survey of the quality of the Australian research houses – Van Eyk, Morningstar and Assirt, Lonsdale and InvestorWeb – showed that 70 per cent of funds management groups involved in the survey had a role dedicated to managing the research process, reflecting the importance placed on research.

The Money Management Rating the Raters Survey, undertaken in conjunction with Tom Collins Consultancy, showed that fund managers often are critical of research houses when a poor rating is given against their fund, from research paid for by-and-large by the fund manager.

It also showed that most managers believed research across the sector, rather then focused on individual performances, was a valuable tool for research.

The survey, released earlier this month, indicates that nearly 60 per cent of fund managers believed the capabilities of research houses were very average, while a quarter felt the houses were below average.

Van Eyk was the standout, with 44 per cent perceiving its capabilities as ‘sound’.

Just 25 per cent of the industry felt the research house was doing an outstanding job, when 70 per cent of the work was being paid for by funds who partook of the survey.

Only 15 per cent believed that the methodology used by the research house was transparent.

Morningstar also stood out for not using research undertaken on fund managers as a leverage for other arms of its business.

Assirt was highlighted as the most likely to use its research to bolster its wider business interests by 63 per cent of respondents, while InvestorWeb followed on 59 per cent and Van Eyk and Lonsdale 53 per cent.

The independence of research houses was seen as a key area of concern for the fund mangers. Almost 87 per cent of the survey respondents called for the ownership and remuneration structures of research houses to be subject to more onerous disclosure laws.

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