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Morningstar hits back at FCA claims rated funds underperform


Morningstar has defended the performance of its positively rated funds after the FCA said that they failed to outperform their benchmarks.

In November, the UK regulator flagged Mornigstar as a case study in their criticism 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 says 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.

“We pick funds which add value”

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”, arguing 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”, and that the firm has had discussions with the FCA about them.

The FCA declined to comment.

In its interim study, the FCA hit out at the rating process on passive funds saying agencies overlook tracker products and favour 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 adds that Morningstar’s analyst team “sits separate” from the fund management team at the company.



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. indistinguishable from zero 12th April 2017 at 3:15 pm

    I can think of a few other things that are indistinguishable from zero, such as the benefits society as a whole obtained from the FSA’s regulation of banks in the UK prior to the financial crisis.

  2. Who wrote the report on behalf of the FCA? The reputational damage of a bad report like this by the FCA where the data is not peer reviewed and is quite large financially and if proven to be inappropriate, then the individual at the FCA should either be required to stand by their comments (they made them and whilst it may be on behalf of the FCA, they should stand or fall on their sword for what they wrote)
    I know I am writing this as “Nameless” but then it is only the FCA I am naming here and NOT the FCA member of staff who wrote the report. They are hiding and NOT defending what they wrote and even the FCA is not commenting to MM (The FCA declined to comment.) They have already commented, but they are neither standing by their comment nor amending it, which is NOT acceptable.

    • Oh and we use about 30% passive funds and 70% active, so I have no active v passive bias, I use what is appropriate for my clients needs.
      As they say, it is esy to be wise after the event (as the FCA is being when critical of active funds), but many of us can say “we told you so” with the banking collapse and “no more boom and bust”. The F-pack are the classic case of the emperors new clothes, both before and after being naked……

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