You can now read 10 articles in a month for free on BostonGlobe.com. Read as much as you want anywhere and anytime for just 99¢.

The Boston Globe

Business

Mutual funds

Will new ratings by Morningstar live up to hype?

CHICAGO — Morningstar is the best-known name in the mutual fund ratings game. So it wasn’t surprising that the industry paid close attention when the investment researcher rolled out a new ratings regime seven months ago.

That’s when Morningstar launched its Analyst Ratings. Now, it’s fair to turn the tables and scrutinize a company that earned its reputation by judging funds in an evenhanded way. Are the new medal ratings proving useful to assess a fund’s prospects, and complement Morningstar’s longstanding one- to-five-star ratings that focus on past performance? And will the company’s Analyst Ratings ever prove influential, given that fund companies heavily promote their funds with five-star credentials, and so far are making scant mention of any that have gold-medal analyst ratings?

Continue reading below

Although it isn’t too soon to make a progress check, it’s also premature to judge how valuable the analyst ratings may be in guiding investors toward worthwhile funds. Give the new system time to prove itself, just as Morningstar waits until a mutual fund has a three-year record before assigning a star rating.

‘‘The jury is still out on this new system,’’ says fund industry consultant Geoff Bobroff of Bobroff Consulting. ‘‘I would love to see that it works, but time will tell.’’

At Morningstar’s annual investment conference on Thursday, the company offered details on the progress and challenges since it began assigning analyst ratings in November. Below is a primer on the new system and a snapshot of its initial seven months:

Ratings explained: Morningstar’s star ratings are based on past returns and the degree of investment risk a fund took to achieve those results. Research firm Corporate Insight found that more than three-quarters of fund companies display Morningstar’s star ratings on their websites.

However, stars aren’t necessarily useful in predicting future performance. So Morningstar introduced subjective ratings to supplement the star system. Analysts assess a fund’s prospects by weighing the quality of the fund manager and parent company, and by evaluating past returns and expenses. The new ratings run from gold, silver, and bronze down to neutral and negative.

Initial results: Out of more than 7,000 US funds, Morningstar has rated 850, and hopes to boost the total to 1,500 by yearend. Large funds are more likely to have been rated than small ones, and the number rated to date represent 62 percent of fund industry assets.

Morningstar fund research director Russel Kinnel says it’s premature after seven months to accurately assess whether funds with gold, silver, or bronze credentials have proved to be stronger performers on the whole than lesser-rated funds.

It’s also not yet apparent whether higher-rated funds have been attracting more cash than lower-rated ones.

‘‘It’s always hard to separate out what is cause and what is effect,’’ Kinnel says.

It’s the same with five-star funds. Did a fund attract lots of money because of the strong performance that earned the fund a high rating, or because of the rating that resulted from the performance?

Morningstar announced last week that it had begun issuing analyst ratings to a fund category where it previously hadn’t assigned them: so-called alternative funds. That’s a broad label for funds that venture into nontraditional assets or strategies. Examples include long-short funds that invest in stocks the fund manager expects will rise in price, while also making ‘‘short’’ bets that can generate returns if certain other stocks decline.

‘‘We are trying to put more attention on alternatives because clients and their advisers are,’’ says Don Phillips, president of fund research. ‘‘They want an uncorrelated asset class: something that will zig when other things zag.’’

As to when fund ads might tout gold- or silver-medal credentials as prominently as five- or four-star ratings, don’t hold your breath. For now, analyst ratings aren’t on most investors’ radars, although Kinnel gets questions about the new ratings from fund companies and financial advisers.

‘‘They’re definitely rising in profile, but the star ratings have been around for 20 years,’’ he says. ‘‘So we’re clearly not at that level yet. It will take time to resonate with a wider audience.’’

You have reached the limit of 10 free articles in a month

Stay informed with unlimited access to Boston’s trusted news source.

  • High-quality journalism from the region’s largest newsroom
  • Convenient access across all of your devices
  • Today’s Headlines daily newsletter
  • Subscriber-only access to exclusive offers, events, contests, eBooks, and more
  • Less than 25¢ a week