Funds Ebb and Flow at the Hands of Morningstar Analysts
Ratings by the research firm direct inflows and outflows for funds that total billions of dollars each year, a study found.
In 2011, Morningstar, the high-profile fund researcher, began assigning an analyst rating to the mutual funds it covered. The fundamentals-driven analysis, which among other things considers the company, portfolio managers, investment process, and performance into its ratings, has proved to have a significant impact on investor enthusiasm for funds.
The link between the analyst rating and the inflows or outflows is undeniable, albeit not as strong as the link between its star rating and flows, according to a report by Morningstar.
For all rating upgrades inflows were about $2 million on average in the first month after the change — a sum that represents a small percentage change in assets under management for most funds. But over time, a better rating translates into more meaningful flows: a cumulative $13 million after six months, up to $46 million after 12 months, and up to $157 million after 36 months. To some funds, those assets and fees collected form them could mean the difference between having a profitable fund or not.
But the analysts give and they also take away.
Downgrades to funds had an even bigger impact on flows. Funds that received a more negative rating showed outflows of $20 million in the first month after their downgrade, $88 million in the six months after, $146 million over 12 months, and $429 million in net outflows over the entire 36 months. Downgrades to “Neutral” or “Negative” ratings had particularly strong links to equity fund flows, according to Morningstar.
The negative ratings and outflows come with some important footnotes. Active funds as a group have had outflows for the past decade, and passive funds have had inflows. Morningstar found there were steady inflows for both upgraded and downgraded passive funds. But upgrades resulted in stronger inflows.
Additional research showed that fund analyst ratings to and from gold, silver, and bronze led to different flow patterns. “Such changes could be a greater call to action since each Morningstar medalist level is equivalent to a recommendation, but neutral and negative ratings are not,” the Morningstar report said. For example, upgrades resulted in strong flows for equity funds, rather weak flows for bond funds, and the weakest flow for allocation funds.
Morningstar’s study of the flows covered a 12-year period that ended in 2022, just before it merged its analyst and quantitative ratings to create a single Morningstar medalist Rating.
The firm analyzed actively managed U.S. fund rating changes and flows from three perspectives: total net flows in dollar terms, flows relative to peers over the same period, and a fund’s own history prior to the ratings change.