CHICAGO, Oct 30, 2003 Morningstar Rating and a New Flexibility Measure Designed to Help Advisors and Investors Compare Separate Account Offerings
Separate accounts now represent more than $400 billion in retail investor assets*, and that number is expected to climb dramatically. To help financial advisors and investors identify separate accounts that may be worthy of further research, Morningstar today introduced the Morningstar Rating+ for separate accounts, which is based on the company's proprietary risk-adjusted return methodology. The company also introduced the Morningstar Flexibility MeasureSM for separate accounts ("Flex Measure"), a tool that helps investors measure the level of customization that each separate account offers.
The Morningstar Rating and Flex Measure for separate accounts are being launched today in Morningstar® DataLab®, a research software product for investment professionals. Both tools will be available in Morningstar® Principia® Separate Accounts, an investment research and management software program for financial advisors, in November, and in Morningstar Advisor WorkstationSM, an online investment planning system, by the end of the year.
"Financial advisors and other professional investors have been telling us there's a need for more transparency and reliable, consistent data in the separate account industry," said Don Phillips, Morningstar managing director. "The Morningstar Rating for separate accounts looks at historical data for two fundamental traits risk and return and compares them against other separate accounts in the same Morningstar Category to help advisors conduct detailed peer analysis with one familiar tool rather than with numerous rankings and metrics."
Paul Fullerton, associate director for industry research firm Cerulli Associates, said, "With broader access to separate account platforms and the proliferation of offerings, financial advisors need a tool like the Morningstar Rating to help them focus on separate account investment portfolios by applying analysis that has been applied to other investments."
The Morningstar Rating for separate accounts is a quantitative assessment of a separate account's past performance both return and risk as measured from 1 to 5 stars. It helps identify management teams that are adding value over time, compared with others in their Morningstar Category.
Morningstar rates separate accounts based on an enhanced measure of risk-adjusted return. Morningstar ranks all separate accounts in the same Morningstar Category by their risk-adjusted return scores and assigns stars based on the following curve: the top 10 percent receive 5 stars, the next 22.5 percent receive 4 stars, the next 35 percent receive 3 stars, the next 22.5 percent receive 2 stars, and the bottom 10 percent receive 1 star. Separate accounts are rated for up to three time periods -- three, five, and 10 years. These ratings are weighted and combined to produce the overall Morningstar Rating.
Separate accounts that do not have ratings can be divided into two groups: those that do not qualify to be rated and those that did not participate. To qualify for a Morningstar Rating, a separate account must be at least three years old and have at least four Morningstar Category peers that are also being rated. The Morningstar Rating for separate accounts rates only firms that supply performance information that complies with Association for Investment Management and Research (AIMR) guidelines.
To ensure that the basis for the ratings is consistent, Morningstar rates only separate accounts that submit sufficient and timely performance and portfolio data. Morningstar will assign a "DNP" or "Did Not Participate" label to separate accounts that do not meet the quarterly data submission deadline, provide a representative portfolio, or supply at least three years of consecutive monthly returns. The "Did Not Participate" label will help investors differentiate among those separate accounts that are not eligible for a Morningstar Rating -- because of a short history or a lack of suitable peers -- and those that are not submitting enough data.
In addition to the new star rating, Morningstar is also introducing the Flex Measure for separate accounts, which helps financial advisors select separate accounts based on the number of options and custom services a particular separate account offers. To calculate the Flex Measure, Morningstar surveys asset managers regarding 18 types of special services and asks whether each service is offered proactively, upon request, or not at all. Morningstar assigns additional points to separate accounts that proactively offer services to investors. The ratio of the points scored to the total number of possible points is multiplied by an adjustment factor for account size. Each separate account is then ranked by its final score. The top third is labeled "Highly Flexible," the next third is named "Moderately Flexible," and the bottom third is considered "Less Flexible."
Morningstar first began offering separate account data through Morningstar Principia Separate Accounts in June 2002. The company tracks more than 170 data points, such as trailing total returns, calendar returns, complete portfolio holdings, composition, sector weightings, Morningstar Style BoxSM, and the Morningstar Ownership ZoneSM on 2,700 separate accounts.
The Morningstar Rating for mutual funds debuted in 1985 and was quickly embraced by investors and advisors. Using a scale of 1 to 5 stars, the Morningstar Rating allowed investors to easily interpret a fund's past performance, and it introduced the concept of risk-adjusted return to the average investor. In June 2002, Morningstar made significant enhancements to its star rating methodology for mutual funds.
The Morningstar Rating is intended for use as a first step in evaluating an investment. A high rating alone is not sufficient reason for selecting a particular investment vehicle.
The Morningstar Categories were introduced in 1996 to classify a fund's investment style based on how it actually invests. Rather than assign an investment to a category based on the objective stated by its asset manager, Morningstar analyzes the underlying holdings and places the investment vehicle in one of 62 categories.
For more details about the new Morningstar Rating for separate accounts, please see the accompanying fact sheet at http://advisor.morningstar.com/uploaded/pdf/SA_RatingFact.pdf. A fact sheet with more information on the Morningstar Flex Measure is available at http://advisor.morningstar.com/uploaded/pdf/SA_FlexFact.pdf.
Please contact Morningstar's media relations department at 312-696-6050 for specific examples of separate account ratings or Flex Measures.
About Morningstar, Inc.
Chicago-based Morningstar, Inc. is a global investment research firm, offering an extensive line of print, software, and Internet-based products and services for individuals, financial advisors, and institutions. The company is a trusted source for investment information, data, and analysis of stocks, mutual funds, separate accounts, exchange-traded funds, 529 Plans, closed-end funds, and variable annuity/life subaccounts.
* According to Cerulli Associates. Separate account industry assets as of June 30, 2003.