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Investment companies and Morningstar: Understanding the research process

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24 February 2015

Jeremy Beckwith, Director of Manager Research UK, Morningstar.

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Morningstar is a leading provider of independent investment research around the world. The first of Morningstar’s values is “Investors First” and Morningstar has a strategic objective to “deliver the most effective investment data, research and ratings to enable investors to reach their financial goals”.

It is these aspects of our corporate purpose that underpin Morningstar’s activities within the UK investment company sector. When journalists seek an independent voice on matters concerning funds and investment trusts, they look to Morningstar’s manager research team.

For 15 years, we have provided the FT with the NAV data for investment companies and our data is used by the leading brokers and analysts operating in the sector. Morningstar is, however, “vehicle-neutral”- open-ended and closed-ended funds that are peers in the same investment area are assessed together. Where investment companies are superior to open-ended funds this is reflected in our research (and vice versa).

For the end-investor, Morningstar's website offers a section completely dedicated to investment trusts. This provides information on price, NAV, performance, discount, gearing, dividend yield, ongoing charges and our analysts’ own independent ratings and opinions on the most-commonly held investment trusts. Investment-selection tools – such as our screener, which matches trusts to investors’ chosen key criteria – help individuals and their advisers to find securities that meet their portfolio needs. In addition, the website provides a host of educational articles, videos and slideshows to enable investors to understand the mechanics of investment trusts and their structures, together with regular multimedia commentary on issues of interest to investment company investors (including from the investment trust managers themselves, as well as their independent board members), updated daily online and delivered via a monthly newsletter. 

Online portfolio tools keep investors on top of the latest news pertinent to all their holdings, and provide a holistic assessment of their performance, asset allocation and potential weak spots. Most investment company data, tools and commentary on are free to all; for a small monthly fee investors can also benefit from our independent and opinionated analyst reports. Each month, helps 320,000 people research and monitor their investments, 45% of whom hold investment trusts, with 20% of the total certified as investment professionals.

Through the website, the investor can also see the results of both of Morningstar’s rating systems. The two are often confused but are, in fact, distinct. The “star” system (ranging from 1 to 5 stars) is purely quantitative and based upon historic returns and volatility, and seeks to distinguish investment companies by their risk-adjusted performance over long time periods in their vehicle-agnostic peer group. The “medal” system (ranging from Negative through Neutral to Bronze, Silver and Gold) is qualitative and forward looking, seeking to help investors identify the successful managers in the future. Most importantly both rating systems are completely independent of the fund managers – Morningstar does not get paid to rate any funds, which is why investors and advisers trust what we say.

For advisers, Morningstar provides the independent perspective they need to respond to ever-changing regulatory and business demands. Morningstar holds regular adviser events up and down the country, and uses these to demonstrate to advisers our detailed analysis of investment trusts. In addition Morningstar’s software tools provide easy-to-read charts, investment reports and proposals for advisers to use in producing proposals for their clients.

For investment company boards, Morningstar provides an independent assessment of their manager’s capabilities, insights into competitor strategies and industry trends, and suggestions for improving shareholder communications.  The independent Morningstar Analyst Reports can often be found on the trust’s own websites as well as those of the fund manager.

For everyone, in recent years Morningstar has been pursuing a campaign for greater transparency. We have been seeking full and regular disclosure of all portfolio holdings.  By providing investors with full information about what the trusts own, we believe that investors are better informed, market share prices become more efficient, and the trusts make themselves more marketable and more likely to be accessed in the post-RDR regime. In 2012 just seven investment trusts that carried a Morningstar Analyst rating disclosed their full portfolio on a monthly basis and a further 7 on a quarterly basis; by 2014 this number had risen to 74 each month and a further 20 each quarter. We believe this greater transparency is one of many contributory factors behind the generalised narrowing of discounts across the sector in recent years.

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