How Morningstar Assesses Portfolio Manager Changes on Funds
Morningstar’s Russ Kinnel explained in a recent article how analysts evaluate changes in mutual fund management teams and thus how investors may better understand Morningstar’s Analyst Ratings. Some portfolio management team changes might lead to a change in a fund’s “People” rating while others may not. For instance, Kinnel writes that certain events, such as a lead manager that is not changing or a team adding a member, may not warrant a full Morningstar analyst review. However, other personnel changes may result in a change in the fund’s “People” rating or the Morningstar “Analyst” ratings. Kinnel discusses several considerations that inform Morningstar’s evaluation of a manager change, including, why the change occurred, i.e., whether the manager left or was fired; whether the new fund manager is steeped in the fund’s strategy; the new fund manager’s record managing money and the relevance of the manager’s record to the fund’s particular strategy; and whether the fund’s investment approach will change. Kinnel notes that Morningstar’s ratings are forward-looking and not heavily dependent on prior managers’ records. “Most often we hear surprise when we downgrade a fund with strong performance but with a new manager who doesn’t have much of a track record. And we might raise our rating faster than others expect when a weaker performer has been given a strong team or manager,” Kinnel writes. The article also discusses the approach Vanguard, Fidelity, T Rowe Price, and other large asset managers use to assess personnel changes on their funds.