Morningstar hits back at FCA on rated funds performance

Morningstar has outlined how their positively rated funds outperform their benchmark over the long term in response to accusations from the FCA in its interim asset management study that the opposite was true.

In November, the UK regulator flagged Mornigstar as a case study in their critics of fund rating agencies who give positive ratings to their funds that are, in reality, most likely to underperform.

The FCA said: “Share classes awarded a Gold, Silver or Bronze Morningstar Analyst rating do not significantly outperform their benchmarks net of charges; net of fees excess returns are statistically indistinguishable from zero over various different holding periods.”

However, in their response to the FCA study, Morningstar questioned these findings.

In a study covering a longer period than the FCA statistics, Morningstar proved funds with a positive rating had returned 0.69 per cent on average after fees over a five-year rolling period between 2002 and 2015, as opposed to losses of 1.02 per cent for those funds not rated by the agency.

These funds not covered by Mornginstar included those which had been closed or merged.

Jonathan Miller, Morningstar’s head of manager research in the UK, says their study was carried out counting 170 rolling five-year windows between 2002 and 2015, while the FCA only looked at 25 and for only seven years – between 2008 and 2015.

He said the timeframe chosen by the FCA caused them “concern”, stating Morningstar’s study is more “wide-reaching”.

He says: “We pick those funds which add value and can outperform and when we put them head-to-head against non-covered funds, the findings are significant.

“If we look at our positively-rated funds, they create value above the index over a five-year time frame.”

Miller says the study’s findings are “statistically significant” for the FCA and that the firm has discussed with the FCA about them.

The FCA declined to comment.

In its interim study, the FCA hit at the rating process on passive funds saying agencies overlook tracker products and favours high rated active funds.

Miller points out Morningstar has been rating passive funds for the past five years and added an ETF rating a year ago. He also remarks that Morningstar’s analysts team “sits separate” from the fund management team at the company.

morningstar fund rating performance