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Morningstar Ratings Change Adds Challenge for Active Funds

Morningstar announced it will enhance its Analyst Rating and Quantitative Rating fund scoring systems based on an updated assessment framework with the changes taking effect on October 31, 2019. These analyst ratings are forward-looking and intended to indicate future fund performance unlike Morningstar’s star ratings, which measure historical fund performance. The new underlying methodology sets a higher bar for funds to earn a Gold, Silver, or Bronze rating and will also double down on fees, Morningstar said. The Analyst Ratings also will be tailored to individual fund share classes, taking fee differences into account. Morningstar said analysts will conduct a more nuanced evaluation of price and performance, taking into consideration “people, process, and parent company pillar assessments.” The new ratings also set a higher bar for active strategies. Analysts will limit Medalist ratings—Gold, Silver, and Bronze—to active strategies that can surpass a relevant benchmark and peer group average net of fees and after accounting for risk. In the past, funds were rated if they beat either their average peer group or a benchmark -- not both measures. Some industry participants say the changes signal more bad news for active managers and will continue the shift of assets to index funds.

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