Morningstar bring ratings algorithm out from behind the veil

The use of algorithms by major research and ratings house Morningstar will come out from behind the veil in Australia and New Zealand as it changes its ratings methodology from Gold, Silver and Bronze to a so-called “Medalist Rating”.

The ratings house admitted that while the algorithm had been in use with respect to its fund ratings in Australia and New Zealand for five years it had been suppressed from customer view and this will no longer be the case.

Instead, users of the Morningstar service will find that ratings assigned by the algorithm will carry a “Q” designation as opposed to those ratings carried out by analysts.

Morningstar said the changeover to the Medalist Rating regime was scheduled to take place in the second quarter of this year.

Commenting on the change, Morningstar director of Manager Research, Annika Bradley, said the Medalist Rating would increase access to ratings whilst maintaining the company’s independence and business model.

“The Medalist Rating will deliver a single, effective forward-looking rating allowing advisers, AFSL’s and investors to screen, sort, and rank to discover best-in-class managed investment products,” she said.

The Morningstar announcement said that the methodology that underpins the rating would not be changing, and the three pillars – People, Process, and Parent—would continue to form the basis for the ratings.

“Under the Medalist Rating, however, how these three pillars are supported will evolve. Currently, only an analyst may assign a pillar. From 2023, in order to scale Morningstar Australasia’s ratings universe, analyst assigned pillar assessments that may be assigned to related strategies will do so, and pillars not currently assessed by analysts will be assessed by our proprietary machine learning algorithm.”

“Morningstar will apply the superscript “Q” designation to pillar ratings assigned by the algorithm to help investors distinguish between pillars assessed by analysts and those assessed by the algorithm.”

“The algorithm has been in operation since 2012, and Morningstar has used it successfully for five years to assess managed investments that analysts do not cover in the U.S. and European markets. The algorithm has also been operating in Australia and New Zealand for five years but has been suppressed from customer view. This algorithmic model has been designed to scale our analysts’ insights and replicate analyst processes as faithfully as possible.”

“Morningstar does not expect any impact with the ratings it assigns to managed investments with this change and analyst assigned pillars and research work will take precedence over the algorithm,” Bradley said.

“Over time, we will see a scaling up of our forward-looking ratings coverage, including our research and rating capabilities.”