3 Winners from Our Fund Rating Methodology Changes

Russel Kinnel: We have modified our Morningstar Medalist Ratings to a simplified structure with fewer moving parts.

Our prior methodology looked at past returns and their variance to infer alpha potential and then adjusted ratings accordingly. A category that had greater alpha potential would be more tolerant of higher fees, and one with lower alpha potential would have lower ratings. There’s good logic there, but it did end up being quite harsh in some areas, with good funds where indexing isn’t a practical solution, or the market isn’t that efficient, getting kind of low ratings.

Under the new methodology, some funds with strong fundamentals are therefore getting upgrades.

To me, target-date funds are one of the industry’s great success stories. They offer low-cost exposure to great funds and a glide path that adjusts investors’ asset mix as they approach their target retirement date. Yet it was very rare for these funds to get Gold ratings because returns tend to bunch in a fairly tight band. As many of the weaker and wackier players have been weeded out, there just aren’t many funds to look better than.

3 Winners from Our Methodology Changes

1. T. Rowe Price Retirement 2030 TRRCX
2. Fidelity Floating Rate High Income FFRHX
3. Fidelity Intermediate Municipal Income FLTMX

T. Rowe Price Retirement 2030 earned high pillar ratings across the board because it had both strong underlying funds and a great team building its glide path. The fund’s retail share class charges 55 basis points. That’s a hair cheaper than average. Under the new methodology, it was rewarded for all those strong attributes, elevating the fund to Gold from Bronze.

Bank-loan funds require credit research and liquidity management, so indexing isn’t a great choice here.

Thus, I was pleased to see Fidelity Floating Rate High Income get upgraded to Gold from Bronze. The fund earns High People and Process ratings and an Above Average Parent rating.

Municipal bond funds are also getting some welcome upgrades. Fidelity Intermediate Municipal Income is going to Gold from Bronze, thanks to its low 37-basis-point fee and its High Process and Above Average People ratings.

Watch These 8 Funds Could Help Steady Portfolios During Rough Markets for more from Russel Kinnel.