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How Morningstar’s New Ratings Will Affect Funds

Beginning on October 31, 2019, Morningstar will roll out its revised analyst ratings system for mutual funds, ETFs, and other managed investments. Overall, the changes would mean downgrades for high fee and actively managed funds.  In a recent column, Morningstar’sJeff Ptak examined the potential aggregate impact the methodology change would have on U.S. funds that have been assigned an Analyst Rating. The following are some of his findings:

  • Roughly 43% of funds and ETFs would see a rating change; many rating changes stem from tailoring ratings to each share class by taking fee differences into account.
  • Downgrades would outnumber upgrades by a roughly 2-to-1 margin.
  • The percentage of active funds rated Gold, Silver, or Bronze would fall; share classes that embed advice and sales fees also would see more downgrades than upgrades.
  • The percentage of index funds earning Gold, Silver, or Bronze ratings would rise; in general, “unbundled” share classes would be likeliest to be named Morningstar Medalists.
  • Most ratings changes would be one rung and involve funds currently rated Bronze (45% of all changes), Silver (27%), and Neutral (17%).
  • Around half of funds with multiple share classes would see multiple ratings across the classes.
  • Only about 26% of funds with above average or high fees would receive Gold, Silver, or Bronze ratings, compared with around 50% today.
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