On 11 January we launched the first Morningstar Analyst Ratings for Closed-end Funds. Our coverage now comprises around 70 funds and still growing. At Morningstar we believe wholeheartedly in the investment trust structure and think these funds have much to offer their shareholders.
There was much to do behind the scenes to enable us to give qualitative ratings to investment trusts. We recognise the need for advisers to be able to compare all funds on a like-for-like—and vehicle-agnostic—basis. While this sounds fairly straightforward, the reality is that it’s a little more complex to get the right information.
We have been working hard to get investment trusts to provide their full holdings on a full and frequent basis—something they haven’t had to do before. We’ve then been able to categorise them according to our Morningstar categories, which are holdings-based, to enable that true peer comparison.
With the funds classified under our proprietary categorisation system, we could then enhance the value of our Morningstar Rating by calculating it using an investment trust’s NAV rather than share price. One of the aims of the Morningstar Rating is to enable a comparison of manager skill, rather than performance that’s beyond his or her control. By classifying investment trusts into our Morningstar categories, you can now see the full peer group of like-minded funds and make more meaningful comparisons.
With full holdings data now available on a regular and frequent basis on many funds, we’ve been able to undertake detailed analysis of those funds and start to issue ratings and reports. The funds we’ve covered so far have been some of the largest by fund size, and also the most familiar or prominent names, but crucially it’s also been where we have good transparency and access to the fund managers. That said, we want to make our coverage meaningful and research those funds on which you want our opinion so there are others on our radar where we’re still working on getting that data and access.
So far we’ve covered funds across a range of sectors, and at this stage we’re focused on the more traditional, equity funds – so global equity, UK, European, emerging markets, Asia and also some of the sector funds.
Transparency is still a challenge, although we’re delighted with the response we’ve had to our paper that we released in May: ‘Investment Trusts: Why Transparency Matters.’ In this paper, we wanted to demonstrate why it’s so important for investment trusts to disclose full holdings and on a frequent basis. Investors and their advisers need to have timely information to be able to fully understand risks to which they are exposed. The response has been overwhelmingly positive—not just from those funds on which we weren’t getting data, but we’ve also seen an increase in frequency from others where we were getting the holdings on an annual or semi-annual basis and this has now moved to quarterly or even monthly.
It’s not just the asset managers that have responded positively, it’s the funds’ boards of directors too. Like us, they see the RDR as an opportunity to bring their funds a little more onto the radar than has been the case in the past. To that extent, more and more they’re looking beyond just their AIC sector peers for comparison purposes when reporting to shareholders and we’re encouraged to see their interest in our use of the Morningstar categories.
The biggest challenge is, still, access. We want to see investment trusts as a feature on the major fund platforms to encourage their wider use. It’s not an impossible task: Alliance Trust Savings has been offering them on their online platform for years.