Today, March 3rd, 2011 Morningstar will be presenting its 2011 fund awards to fund managers and representatives of fund houses that have exhibited exceptional value to investors over the last 12 months. Morningstar is of course not alone in handing out fund awards so I thought it might be useful to examine what fund awards really mean.
It is awards season and there will be no shortage of press in the coming months about this fund winning that award and this fund house being recognized, but I think it’s worth looking at awards a little closer to see if they can actually give investors something worth thinking about.
Some awards are popularity contests – the same groups of managers win every year and the same fund houses are recognized for their perceived qualities. The judging process for these awards is not always 100% transparent either so while they may recognize popular funds or those that attracted large sums over the last year, these are not always the same as the best funds for investors. The time period over which a fund is judged may vary as well, possibly rewarding a big bet, while not considering a longer track record that is possibly more important for investors.
So in the spirit of transparency and with the intention of providing something valuable to investors, Morningstar’s awards methodology is summarized below:
- There are 2 categories of awards – 1 for funds within Morningstar Categories, and 1 for fund houses.
- For the Morningstar category awards, a quantitative screen is done looking at both performance and volatility over the last 1, 3 and 5 year periods with an emphasis on the last 12 months because the awards are given annually.
- The top 10 funds within each category are then vetted by Morningstar fund analysts who look at investor accessibility, the accuracy of a fund’s stated mandate and if that fund can continue to outperform.
- For the fund house awards, Morningstar Risk-Adjusted Return (MRAR) is calculated for all share classes of all funds offered then a mean percentile rank is calculated using the MRAR of all share classes – the lower the mean percentile rank, the better the performance
- This mean score is then adjusted using a probability function to compensate for the different numbers of funds various fund houses offer.
- A qualitative review is then carried out to to ensure awards are not given purely based on performance. A loss of key talent, an increase in fees or decreased availability to retail investors may disqualify a fund house from receiving an award.
- Only those that provide Morningstar with full portfolio holdings data are considered for awards
A complete explanation of the methodology can be found here.
Check back here next week for a recap of the winners and some pictures of the event.