Morningstar Quantitative Rating™

[chang]

Not sure if everyone has seen this. If you go to the Quote page on M* for a fund that is not covered by an M* Analyst, you'll see this new message:

The number of funds that receive a Morningstar Analyst Rating is limited by the size of the Morningstar analyst team. To expand the number of funds we cover, we have developed a machine-learning model that uses the decision-making processes of our analysts, their past ratings decisions, and the data used to support those decisions. The machine-learning model is then applied to the "uncovered" fund universe to create the Morningstar Quantitative Rating (denoted on this page by a ), which is analogous to the rating a Morningstar analyst might assign to the fund if an analyst covered the fund. These quantitative rating predictions make up what we call the Morningstar Quantitative Rating™ for funds. Click here for more on how to use these ratings.

[yogibearbull]

Q ratings have been around since 2017. These are computer-generated and use AI to emulate M* Analysts. Some of the writeups are BAD, full for boiler plate language and contradictions.

For a positive spin, see a current article on M* Homepage,   www.morningstar.com/articles/1030233/how-to-use-the-morningstar-quantitative-rating-analysis

[chang]

Seems like an awful idea to me. Hard to believe people are still paying $200+ for this.

[fishingrod]

Yes, I had noticed this some time ago. Everything is going AI. Filters upon filters to come up with acceptable choices for ratings.

[yogibearbull]

Good thing is that these do/will not replace actual analyst ratings. Problem was that those actual analyst ratings covered only 10-15% of the funds. So, the expansion is with auto-generated Q ratings to include more [but not all] funds as rated. 

[fred495]

FYI and FWIW, below are excerpts from a somewhat confusing and contradictory recent M* Quantitative Analysis Report.

For example, on the one hand, M* claims that HMEZX has "a weak portfolio-management team" but, on the other hand, it also states that a "sign of strength at Highland is its management team, which boasts an average asset-weighted tenure of 15 years at the firm. This accumulation of experience builds confidence that the group can navigate a variety of market environments adeptly."

Which is it? Is the management team of HMEZX "weak" or is it a "sign of strenght"? What am I missing?

M*'s Karen Wallace says that "Investors have come to rely on Morningstar's forward-looking Analyst Ratings as crucial inputs for screening investments and making buy and sell decisions." However, the question is: Does Quantitative Rating, a machine-learning model, really "mimic how our analysts would rate a fund if they're actually covering that fund."? From this example, I would give M*'s Quantitative Fund Reports a failing grade:

"NexPoint Merger Arbitrage Z earns a Morningstar Quantitative Rating of Negative because of negative contributors including a weak portfolio-management team and a questionable investment process. [...]

Despite the portfolio managers with industry-standard experience and its longest-tenured manager's experience, the team managing NexPoint Merger Arbitrage Fund has a considerable number of weaknesses, warranting a Low People Pillar rating. The team is led by James D. Dondero, the longest-tenured manager on the strategy, who brings 23 years of industry experience. They’re also the named manager on eight additional funds, a total of $1.30 billion in assets. The funds have an average Morningstar Rating of 2.3 stars, demonstrating disappointing risk-adjusted performance. The team is small, but adequately equipped, with only two other supporting managers. Together, the three boast an average of nine years in the industry. [...]

Highland has a way to go to become an industry-standard steward, resulting in a Low Parent Pillar rating. Highland products are costlier than similarly distributed funds at other highly-rated asset managers, on average in the second most expensive quintile of category peers. The higher expense profile contributes negatively to the firm's overall stewardship rating and creates a larger performance hurdle. The firm has not had a durable fund lineup. Specifically, its five-year risk-adjusted success ratio demonstrates that only 21% of products both survived and beat their respective category average on a risk-adjusted basis,. A low success ratio not only indicates poor performance but also raises flags about a firm’s discipline around investment strategy and product development. A sign of strength at Highland is its management team, which boasts an average asset-weighted tenure of 15 years at the firm. This accumulation of experience builds confidence that the group can navigate a variety of market environments adeptly.

March 22, 2021"

I have forwarded this post to M*. They have acknowledged receipt of same. Awaiting a reply.

Fred

[fred495]

FYI, below is the response I received from M* regarding my above OP:

Hi Fred,

Hope you are doing well!

Please make a note that we have received a response from our team as mentioned below.

The weak management team refers to the team managing the NexPoint Merger Arbitrage fund while the firm Highland does benefit from having long-tenured managers.

The disconnect is one is looking at the fund while the other is looking at the firm.

If you have any additional questions, please feel free to get in touch with us.

Best regards,

Ajay C

Product Consultant

Morningstar Global Product Support

Morningstar, Inc.

Morningstar. Illuminating investing worldwide.

[nromsted]

I do prefer the real Analyst Ratings on M*, even though sometimes I wonder what motivates their analysis.

I also prefer the Quantitative Ratings over what they used to have (i.e., just a note saying this fund has no current analyst rating). Yes, these Quantitative Ratings aren't the best, but they are not entirely useless.

I think it might be interesting to compare a real Analyst fund report with the Quantitative report for that fund - just to see what the differences are.

[fred495]

Apr 17, 2021 16:24:32 GMT nromsted said:

I do prefer the real Analyst Ratings on M*, even though sometimes I wonder what motivates their analysis.

I also prefer the Quantitative Ratings over what they used to have (i.e., just a note saying this fund has no current analyst rating). Yes, these Quantitative Ratings aren't the best, but they are not entirely useless.

I think it might be interesting to compare a real Analyst fund report with the Quantitative report for that fund - just to see what the differences are.

I don't know if that is possible. I think that for a specific fund you either get a report that's written by an analyst, i.e., a human being, or you get the computer generated Quantitative Rating that I used as an example in my above post. But, if you want to be sure, check with M*.

Fred

[yogibearbull]

That research is internal to M*, i.e. comparing Q ratings with actual analyst ratings for the same funds. As for the public, it is one or the other.

[anitya]

Interview on the topic -

www.morningstar.com/articles/1030233/how-to-use-the-morningstar-quantitative-rating-analysis