Licensed Data Release Notes
As we communicated in July, Morningstar plans to enhance the calculation for the Morningstar Rating™ for Funds for open-end (OE) and exchange-traded funds (ETFs).
To provide you with more time to prepare for the changes, Morningstar will delay the release of the enhanced Morningstar Rating calculation as well as enhancements for the Oldest Share Class and Extended Performance methodologies until Nov. 30, 2016. The new ratings will begin appearing in our products on that date. We appreciate your understanding in this matter.
Morningstar still plans to deliver its new Analyst Rating™ for ETFs on Oct. 31, 2016. In addition, Morningstar will adjust the classification of bonds that mature within one year as “cash” to apply to bonds that mature within 91 days, which is in line with broader investment, regulatory, and accounting perspectives in the industry. This adjustment will go into effect on Oct. 31 as well.
The following is a summary of the changes taking place on Nov. 30, 2016:
As of the same date, Morningstar will also enhance the methodologies for Oldest Share Class and Extended Performance. Morningstar’s methodology enhancement is designed to select the most representative share class for a fund, using a modified set of criteria in the event that multiple share classes have the same inception date. The Extended Performance methodology will also use the enhanced Oldest Share Class methodology, and will allow the extension of a share class’ performance to the original inception date, even if the originally-launched share class is no longer active.
Effective Oct. 31, Morningstar will adjust the classification of bonds that mature within one year as “cash” to apply to bonds that mature within 91 days, which is in line with broader investment, regulatory, and accounting perspectives in the industry.
Removal of load adjustments
Historically, a fund’s performance in the Morningstar Rating calculation is adjusted for front-end loads, deferred loads, and redemption fees. Increasingly, Morningstar finds that investors pay for distribution and advice in different ways, but the current calculation only captures the payment for load classes. Incorporating the load into the Morningstar Rating is therefore penalizing load share classes because of choices investors make about how to pay for advice.
Morningstar is removing the load adjustment from the Morningstar Rating calculation to better reflect the current state of the industry. In the United States, approximately half of A share class investors don’t pay the full load, and the Morningstar Rating previously assumed the maximum fee for load investors and the minimum fee for no-load investors. Most no-load assets are coming through financial advisors who are adding a fee. The situation is similar in markets outside the United States, often with a maximum possible load stated and very few, if any, investors actual paying that load.
Morningstar will also remove the load waived share classes from its products. Because the Morningstar Rating calculation will no longer include load adjustments, there is no longer a requirement for the load waived share class.
Combination of ETFs and open-end funds into one peer group
Investors typically view ETFs and open-end funds as interchangeable as ETFs are increasingly sold through financial advisors and fund platforms. Placing ETFs and open-end funds into the same universe in the United States and Australia will allow investors to more readily compare the investments and brings those regions in line with Canada and EMEA markets where Morningstar already calculates the Morningstar Rating for the combined universe.
Morningstar will begin calculating a combined category average and ranks for the combined universe, using historical open-end category averages and incorporate ETFs going forward. These changes will apply to all ranks based upon category assignment, including fee level groups.
Morningstar will discontinue calculation of standalone ETF category averages and ranks. ETF market return category averages and ranks will also be discontinued. Vehicle-level market returns for ETFs remain as a component of SEC Standardized Returns.
Morningstar’s firm-level statistics will now take into account both open-end funds and ETFs for asset managers that offer both vehicles.
Morningstar will not restate historical ratings for open-end funds and ETFs.
Morningstar will restate annual category ranks for open-end funds and ETFs based upon the combined peer group, in order for the historical ranks to align with the newly released methodology.
Discontinuation of Morningstar Ratings for ETNs
ETNs and ETCs are investment vehicles with significantly different investor protections than funds. As unsecured or cross-collateralized debt instruments, insolvency of the issuing company or a failure in a cross-collateralized ETC can result in investors receiving materially less than the underlying investment returns, after operating and management expenses. These risks make these investments inappropriate to compare with fund structures; therefore, Morningstar will no longer calculate Morningstar Ratings for these investments, but the historical ratings will still be available.
At Morningstar, we continuously look to enhance our methodologies and ratings to make them more useful. Please see the additional notes specific to Licensed Data Products, including Data Feeds, Morningstar Essentials, and the Morningstar API Center, as well as the FAQ document and the Data Feed Impact Analysis spreadsheet to help provide more detail on the changes that can be expected in our data feeds. Please note, updates have been made to the spreadsheet, and this is the latest version. If you have any questions, please contact your relationship manager.
Published July 2016, updated August 2016 and September 2016 and October 2016.