Morningstar: what it is and how it works
Ahorro e Inversión I March 1, 2021
If you have some money saved and want to get a return on it, you're definitely thinking of changing status from saver to investor. But, when you decide to invest, you realise that the market offers a wide range of financial options to choose one that best suits your profile. To help you in your choice, you have some tools that will give you a better insight into all these alternatives. Morningstar is the place to find information, analysis and monitoring of a range of financial products.
Morningstar is a supplier of analyses and assessments of financial products, which started up in 1984 to generate tools and products to help end investors. Its creator, Joe Masueto, has always felt that data and information on investment funds ought to be public and accessible to one and all.
And that is what he did in Morningstar: compiling, classifying and organising accessible and comprehensible information on a single platform on all investment products, so that any user can manage their investments better, and achieve their financial objectives. And even though he started out analysing funds exclusively, one of the most interesting features of the system is the huge amount of assets currently available in the database, over 500,000, easily accessible on the website. This has made the site a financial analysis benchmark. Morningstar Spain started up in 2001, and its website gives access to information on funds available to private investors in Spain.
Morningstar provides data and analytic conclusions on a wide financial range, including managed investment products, listed companies, private capital companies and market data in real time. These product analyses are performed from all perspectives, i.e. it is not just number-crunching.
In this regard, Morningstar has developed a classification system which appraises the quality of investment funds – putting them into categories (for comparative purposes) - depending on their returns (in the last three, five and ten years), with due consideration given to the commissions on each product (not only management and deposit commissions, but also subscription fees which affect your final return), and also the risk involved (for the same return, it is preferable to invest in a fund with fewer risks, i.e. with fewer fluctuations on its returns). And so, Morningstar draws up its own rating, which issues a score for each product between one and five stars.
Of course, you may find funds which do not have any stars at all. As Morningstar states, there are situations in which a rating cannot be established, because the lifespan of the fund is less than three years, because there is not enough information for it to be included in one of the categories analysed by the company, when there are no similar products to establish any kind of classification, or when the fund has undergone major changes in its investment strategy, and so its historic profitability data are irrelevant.
Morningstar states quite clearly that the rating is exclusively quantitative, i.e. it is based on past calculations of reward and risk (more specifically, calculations are carried out on a monthly basis, and are based on monthly data over the last three years). Therefore, no subjective or qualitative data are considered in the appraisal of the fund. In this regard, they also issue a warning to the effect that past returns are no guarantee of future returns (the fact that a fund has had good results in the past does not mean that it will continue to have good results in the future). However, the Morningstar rating can serve as a guide for you to plan an investment.
In terms of the procedure followed by Morningstar to award its stars, you must bear in mind that the company analyses all the funds and scores them in due consideration of aspects such as profitability or commissions. When all the products have been graded, Morningstar draws up a ranking with all of them in accordance with their final scores. And when all the products have been classified from greater to lower scores, Morningstar issues its rating between one and five stars.
So, 10% of the funds in the higher section of the classification are awarded five stars, regardless of their score (i.e. if the ranking contains 200 products, the first 20 will be given the maximum score). 22.5% of the products after the first products will be given four stars (in the example, these would be the 45 funds after the first 20 funds which obtained a five-star rating). The next 35% of products (pursuant to our example, the 70 funds in positions 66 to 135) are given three stars, and the next 22.5% are given two stars (the next 45 products), and the last 10% are given one star (the last 20 funds in the classification). This means that the rating of a fund may vary despite the fact that its investment, costs and returns have remained steady, depending on whether the situation of funds has improved or worsened.
Remember that Morningstar is a tool which can be extremely useful to find investment funds adapted to any investment strategy you may have devised beforehand. Morningstar can help you in your search, but it won't tell you how to invest. However, if you want to structure a diversified portfolio and you have already devised a diversification strategy, all you have to do is use the advanced fund search tool to find funds in that category that are of interest to you, and use the 5-star ratings provided by Morningstar. This is a comprehensive tool which allows you to search and filter in accordance with almost any filter that interests you.
In addition to reports and analyses concerning the funds industry, Morningstar provides you with a tool to create or continue your personal portfolio. In My portfolio you can devise your own portfolio and, if you have already created it, you can see at a glance a radiography of your global position (summary of all the shares and bonds in your funds), comprehensive information on each of the investment funds and tables on all the funds which can be organised pursuant to the criteria required.
Morningstar also has a fund comparison facility, where you simply click on the name of the products you wish to compare. You can also conduct a search of qualitative analyses. You can also search a list for any funds with a qualitative rating.
Also, in addition to the famous Morningstar Rating, the company also offers you other innovative exclusive investment tools:
Morningstar offers products and services for private investors, advisors and companies which provide them with services.
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