Morningstar is rolling out an automated system that will expand its analyst rating system to nearly all of the open-end funds and ETFs it tracks.
Advisors should see the new Quantitative Rating system on the Morningstar Advisor workstation by the end of this month, Morningstar officials said Wednesday.
The computer-generated quantitative ratings seek to emulate the current Morningstar Analyst Rating for funds, a forward-looking assessment that assigns gold, silver, bronze, neutral and negative ratings (not to be confused with Morningstar’s well-known “star” rankings that measure past risk-adjusted performance.)
The goal of the new quantitative system “is to replicate how analysts make decisions,” said Timothy Strauts, director of quantitative research for Morningstar, on a webinar Wednesday.
Morningstar analysts have ratings on about 1,800 funds and ETFs, but the quantitative ratings, generated by a rules-based system based on the analysts’ past decisions--will extend the ratings to more than 10,000 funds and ETFs.
The key thing to watch will be how the automated methodology performs with out-of-sample data, that is, in real time.
According to the company, the gold/silver/bronze ratings from analysts have been effective in weeding out poor performers.
Will a machine do as well?
“We’ll continue to monitor the ratings,” Strauts said in response to questions. “And the analyst team does see the quantitative ratings, and if anything looks out of whack, they will alert us.”
The new process was put “though its paces,” added Jeffrey Ptak, Morningstar's global head of manager research. “It was very important to us that we had an algorithm that was doing a faithful job.”