Morningstar analyst ratings hit another speed bump

Morningstar’s efforts to vastly expand its forward-looking mutual fund ratings system by letting computers write the reports might be getting off to a bumpy start, given a Twitter tiff this week involving a disgruntled fund manager.

Corey Hoffstein, chief investment officer at Newfound Research, challenged the company's analysis of his funds on Thursday by tweeting, “These new Morningstar quantitative ratings are hot garbage.”

Hoffstein, who declined to comment for this story, expanded the Twitter post into a thread that stretched over two hours, highlighting where he claimed Morningstar is incorrectly analyzing his fund strategies and his frustrations with the feedback he has been getting from Morningstar.

“I’m getting negative scores for managing 10 funds and having $0 invested in my own fund. Neither of those are true. The fact this was released tells me M* doesn’t realize the influence it has on the industry,” he tweeted.

Morningstar offices were closed in observance of Good Friday, but a spokesperson responded to an interview request by emailing links to a Twitter thread from Jeffrey Ptak, Morningstar’s global director of manager research, responding to Hoffstein’s comments.

Ptak, who did not respond to a request for comment, acknowledged one of Hoffstein’s complaints about Morningstar incorrectly reporting the number of funds managed by Newfound Research.

“Beyond your funds, our testing finds the quant rating has done a good job of sorting US funds based on future performance since we rolled it out in early 2018,” Ptak tweeted.

Hoffstein, who said the issue with Morningstar’s forward-looking analyst ratings goes beyond just his funds, also complained about having to pay a subscription to see the reports on his funds.

“Second of all, this is all hidden from me because I won’t pay M* for it,” he tweeted. “So the only way to know if their rating on my fund is wrong is to pay them $10k/year, or whatever it is, so I can even see it?”

According to Morningstar, the ratings are available to Morningstar Premium members, which charges an annual subscription rate of $199.

Morningstar's analyst ratings are distinct from its more popular star ratings, which are based on past performance. The analyst ratings have been a work in progress since they were first announced at a Morningstar conference in 2011.

At the initial unveiling of the concept, the forward-looking analyst ratings gave funds scores of between single-A to triple-A, but that was abandoned almost immediately because it looked too much like a bond rating.

The solution was to grade funds as gold, silver, bronze, neutral or negative for what was presented as a more flexible and qualitative look at fund strategies, managers and fund companies.

Of course, even with 130 global analysts, Morningstar was ill-equipped to produce forward-looking reports on a universe of nearly 40,000 mutual funds, which led to the latest effort to leverage computer programs to generate the reports.

Speaking on the topic for a story posted on Morningstar’s website, Timothy Strauts, director of the quantitative research group, said the company has big aspirations for the computer-generated reports, which will expand coverage widely beyond the 4,284 reports generated by human analysts.

While Morningstar has been providing the basic quantitative ratings for most funds for more than three years, Strauts said the missing element has been written reports, which are now being generated by computers for most funds.

“So what we're trying to do with quantitative analysis is to create an auto generated report that provides the information to the investor as far as what is the reason behind the rating, what are the inputs that drove the rating, whether it'd be positive or negative, and we've tried to kind of mimic the analyst style in the report,” he said. “In the end we try to hope that the investor couldn't even tell that it was auto generated versus written by an analyst. Now, that may not be the case today. We're definitely going to try and improve this over time.”

While the forward-looking analyst ratings might be a work in progress that will continue to evolve through computer learning, they are still viewed by most investors as secondary to the performance-based backward-looking star ratings.

“Independent ratings of mutual funds matter to advisers and investors, because there are thousands of potential investments and a third party can help validate or highlight concerns about an investment strategy,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA, which applies its own fund ratings that combine historical and forward-looking analysis.

“Morningstar puts its fund ratings behind a paywall, and so does CFRA,” Rosenbluth added. “It’s a business.”