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Morningstar defends its fund ratings from FCA criticism

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Morningstar defends its fund ratings from FCA criticism

Investment performance analyst Morningstar has defended its fund ratings from criticism by the City watchdog but acknowledged the 'active' funds it monitors have struggled since the 2008-09 financial crisis. 

In a highly critical review on Friday the Financial Conduct Authority (FCA) said the average actively managed fund failed to beat the stock market after fees and therefore did not justify the higher costs paid by investors. It proposed a new all-in charge and improved governance standards for fund managers.

The FCA cited Morningstar as an example of a fund ratings provider whose service similarly fell short.

After analysing the performance of funds awarded a five-star Morningstar rating, the regulator found they did not significantly outperform their stock market benchmarks over three and five years after charges were taken into account.

However, it acknowledged that Morningstar rated funds did do better than non-rated funds. The same was true of Morningstar’s 'gold', 'silver' and 'bronze' ratings, it said.

Jonathan Miller, director of manager research at Morningstar, disputed this, saying the company's long-term data showed funds picked by its analysts did beat the benchmarks, such as the FTSE All Share or MSCI Europe Value indices, that were assigned to them.

Similarly, for the past 15 years or more, its gold, silver and bronze rated funds had also beaten the market if the funds were held for either three or five years after the rating was awarded, Miller said.

However, he admitted this had not been the case in recent years. 'Notably, this has not been the case since the end of the global financial crisis, reflecting the difficulty active managers have experienced adding value in that relatively short time,' Miller explained.

'However, even in this more recent period, gold rated funds have delivered material outperformance net of the specified benchmarks. And all three positive ratings, gold, silver and bronze have delivered strong outperformance versus their Morningstar category peers over the post-great financial crisis period, showing that our analysts have picked good managers relative to the available pool.'

Responding to the FCA's observation that ratings providers like Morningstar and brokers' 'best buy' fund lists could do more to cover index-tracking funds, Miller said the company was aware it must prove itself 'in the context of readily available, low-cost "passives".'

The growth of index funds and exchange-traded funds (ETFs) must be welcomed, he added, because investors are provided with greater investment choice.

'Our analysts have rated open-end passives in the UK for some time, and recently launched Analyst Ratings on 300 ETFs around the world, including 100 available to investors in the UK,' he said.

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