Morningstar Medalist Rating - Upcoming Changes

Comments

• yogibearbull

  December 6 edited December 6

  What does all this mean in plain English?
  
  I read the OP link and the links within it more than once to figure out what is changing. The current Morningstar (M*) Medalist Rating system is very complex with dozens of inputs (from analysts or computer-generated), but that is going away, so there is no point in discussing that. Just accept that the new Medalist Ratings will use a simplified system with fewer inputs.
  
  There are 3 big changes:
  
  1. A relative ER input (MPS) will be used and will have 30% weight. In an example shown, the values of this ER or MPS parameter can put a fund from Gold to Neutral when "other" parameters (with 70% weight) are the same. Those "other" parameters are the familiar "pillars" of "people", "process" and "parent".
  
  As is reasonable, the internal weights assigned vary for active (highest weight to "people" and "process") and passive (highest weight to "process"} funds.
  
  2. There will be no performance related input as the performance-alpha of the old/current Medalist Ratings will be dropped. I think that people in future may find highly-rated (new) Medalists whose performance stinks.
  
  This may be an extreme deviation from the M* Star-ratings that are solely based on performance (or, backward-looking or momentum-driven).
  
  3. M* likes dynamic or relative or % scale for most items, but it will use an absolute scale for the overall scores used to assign new Medalist Ratings. M* says that this should make Medalist Ratings more stable - they can change for unexplained reasons now.
  
  Bottom line? By M*'s own analysis of comparative data, the new Medalist Ratings will have 29.3% Gold + Silver + Bronze vs only 22.8% now. So, the Medalist Ratings of several funds will go up and that should make fund firms and their holders happy. Well, why not some grade inflation here?
  
  If you are also interested in performance of the funds, in future, you would have to look at both Medalist Ratings and Star Ratings.
  
  These are my impressions, and posters can correct if I misinterpreted somethings.
• WABAC

  December 6

  Expense ratios have always been a big part of their research as long as I have been reading.
  
  I can't help but think the rest of it is designed to decrease the load on their IT resources. I have never paid attention to their medal ratings anyway, so . . .
• Observant1

  December 6 edited December 6

  yogibearbull said:

  [snip]
  2. There will be no performance related input as the performance-alpha
  of the old/current Medalist Ratings will be dropped.
  I think that people in future may find highly-rated (new) Medalists whose performance stinks.
  [snip]
  
  Bottom line? By M*'s own analysis of comparative data,
  the new Medalist Ratings will have 29.3% Gold + Silver + Bronze vs only 22.8% now.
  So, the Medalist Ratings of several funds will go up and that should make fund firms
  and their holders happy. Well, why not some grade inflation here?
  [snip]
  

  Current Medalist Ratings do not incorporate a distinct Performance Pillar.
  
  "Morningstar evaluates a vehicle’s performance as part of its overall assessment.
  However, performance is not a distinct pillar.
  Rather, Morningstar considers performance within the context of the other pillar
  assessments it conducts, notably People and Process."
  
  Morningstar Medalist Rating Methodology ver. 1.8
  https://s205.q4cdn.com/437373358/files/doc_downloads/2025/03/25/1227010-42.pdf
  
  Performance data may be incorporated within the People and Process pillars
  and be measured against category averages instead of category benchmarks.
  
  ----------------------------------------------------------------------------------------------------------------------------------------------------
  
  I believe the methodology for Medalist Ratings was last modified in October 2024.
  It appears that the latest methodology enhancements will bring Medalist Rating
  distributions to about the same levels seen prior to the October 2024 changes.
  
  "We expect around 20% of rated funds to see a rating change because of this methodology
  enhancement, most of those being downgrades. As a result, we expect the Medalist Ratings
  distribution to shift, with Gold, Silver, and Bronze ratings projected to account for around 23%
  of rated global funds compared with about 30% today."
  
  https://www.morningstar.com/funds/why-were-enhancing-morningstar-medalist-rating
  
  
  Edit/Add: Discover the Future of Morningstar’s Medalist Ratings
  Dec 11 2025, 11:00 AM PST | 60 mins
  https://www.morningstar.com/business/insights/webinars
• yogibearbull

  December 7

  From the old/current document, there is APE = Alpha Potential Estimate that is incorporated into the score calculations, e.g. for active funds, as follows:
  (0.45 * People Score * APE) + (0.45 * Process Score * APE) + (0.10 * Parent Score * APE)
  = Expected gross-of-fee alpha
  
  Alpha is from MPT analyses (Greeks alpha, beta). So performance through APE had a direct and heavy bearing on the Medalist Ratings.
  
  Now, this APE will be gone.
  
  BTW, the M* article author Laura Lutton posted it on LinkedIn and I posted my abbreviated comments there. I will post here if there is any response from her or other Morningstar people (and some lurk here).
  LinkedIn LINK
• Observant1

  December 7 edited December 7

  The following advantages were stated (among others) for the new Morningstar Medalist Rating:
  • Identify strategies Morningstar believes should be able to outperform their Morningstar Category average
  on a risk-adjusted basis over time.
  • Call out strategies that Morningstar expects to underperform their Morningstar Category average
  on a risk-adjusted basis over time.
  
  Since APE will be gone, it's not clear how outperformance/underperformance will be determined.
  
  People: Actively Managed Strategies (pg.9)
  The relevant personnel are judged along several axes:
  • Experience & ability
  • Fit & structure
  • Workload
  • Communication/information flow
  • Temperament
  • Alignment of interests
  • Key-person risk
  • Team stability
  
  Perhaps performance measures will somehow be incorporated within "Experience & ability?"
  
  Process: Actively Managed Strategies (pgs. 9-10)
  Analysts look for strategies with a process distinctive enough to increase the potential for long-term success. More specifically, analysts seek to understand:
  • The investment philosophy that underpins the strategy;
  • The key “edge” of the process as executed by the manager;
  • Elements that are systematic and repeatable, if any;
  • The fit of the process with the resources backing the strategy
  and with the size of the asset base tied to the strategy (including all vehicles across all domiciles);
  • Whether the process has been consistently applied,
  as demonstrated by the composition of the portfolio over time;
  • The risks entailed in the process, from a portfolio-bias point of view and from an ability-to-execute point of view;
  • The managers’ approach to risk management;
  • Analysts’ expectations for performance in different market environments, assuming the process is adhered to;
  • Whether there is reason to believe the process can add value across the cycle
  versus the relevant benchmark or category on a risk-adjusted basis;
  • The suitability of the strategy for different types of investors given the risks
  one would expect to see in its portfolio; and
  • Any historical changes in approach or style, and the reasons for those changes.
  
  How exactly will analysts decide "Whether there is reason to believe the process can add value...?"
  
  Ms. Lutton will hopefully respond and provide needed clarity.