What Do Morningstar Stock and Fund Ratings Tell Me? - YouTube

Welcome to the homepage of Morningstar.co.uk. This 5th tutorial video of the series will

help you make the most of our analyst research into stocks and funds when managing your investments

to achieve long-term financial goals. We'll look at how you can use our analyst research

into stocks, funds, investment trusts and ETFs. So, let's get started with fund research.

This is the Old Mutual UK Equity Fund page. You can see that this fund has a Morningstar

rating of 3 Stars and an Analyst rating of Bronze. But what does that mean? The Star

rating is a backward-looking rating. It measures the fund's performance over the past three

years adjusted for risk and compares it to the performance of all other funds investing

in the same area. A 1-Star rating means the fund is amongst the worst performers underperforming

the average of its category peers over the past three years, while a 5-Star rating means

the fund has performed amongst the best in its group. So, in the case of Old Mutual UK

Equity, its 3-Star rating means the fund has achieved returns broadly in line with its

sector peers over the last three years. These Star ratings are automatically assigned to

OEICS and unit trusts, investment trusts and exchange-traded funds using the same risk-adjusted

performance methodology.

So, what about the Morningstar Analyst rating? While the Star rating is looking solely at

past performance, the Analyst rating is the summary of the Morningstar's forward-looking

analysis of a fund. Analysts assign a fund one of five ratings. The top three, Gold,

Silver and Bronze, are all positive ratings and indicate that our analysts have assessed

that the fund will outperform its benchmark and peers over the long term. The higher their

conviction in the fund, the better the rating with Gold obviously being the highest accolade.

There are two more analyst ratings, Neutral and Negative. A Neutral rating is given to

those funds that Morningstar analysts believe are neither overly positive nor negative on

its future prospects. A Negative rating though is given to funds that have at least one significant

flaw that leaves our analysts to believe it will underperform its sector peers going forwards.

Analyst ratings and reports are available for all OEICS, unit trusts and investment

trusts under coverage. Analysts also write in-depth research reports on ETFs, but do

not assign a rating on the Gold to Negative scale due to the passive management nature

in these securities. Let's look back at our example to find out why Morningstar's research

team believes Old Mutual Equity is a Bronze fund and learn a little more about how they

assess each fund.

Let's click on the 'Morningstar Analyst Research' tab found on the fund report. All visitors

to Morningstar.co.uk can access our analyst summary research reports on funds for free

simply by logging in to your free account or registering if you are not yet an account

holder. For a small fee premium subscribers get to enjoy a much more in-depth research

report that analyses each key aspect of the fund.

So, let's login. As a free user of Morningstar.co.uk you will see the analyst overview of why the

fund has earned its analyst rating. This explains briefly how we have assessed the five key

areas considered when rating a fund; its investment process, its historical performance, the people

managing the fund, the parent company, and the price or fees associated with that fund.

These are the five key areas that we believe are crucial to predicting the future success

of funds.

If you are a premium member, you get to enjoy the analyst's full report including a detailed

breakdown of their assessment of each of the five key areas. This level of detail is not

available to non-premium members.

Old Mutual UK Equity's Bronze Analyst rating implies therefore that we believe this fund

will outperform peers in the long term, but it's not what we would consider a best in

breed fund as these of course would boast a Gold rating.

We've briefly covered our fund research. Now, let's take a look at our stock analysis.

This is energy firm Centrica. We can see that Centrica currently has a 4-Star rating. It's

important to note that stocks are very different investments from funds and so how we rate

this security type is also very different. For stocks, our Star rating is not a measure

of past performance as it is with funds but rather it is an assessment of whether the

share prices currently expensive or cheap compare to our analyst valuation.

Morningstar's equity analysts assess a number of core criteria and meet with company management

as a part of their research process. Their comprehensive analysis of a company includes

the firm's competitive advantage known as an economic moat here at Morningstar, what

we think the shares would be worth based on a discounted free cash flow valuation model

and any risks or uncertainties that prospective shareholders need to be aware of. We then

derive a Star rating for each stock by comparing its share price that day with our analysts'

own assessment of the shares are intrinsically worth. If the stock is trading significantly

below our fair estimate, it will receive a 5-Star rating. If it is significantly above

our valuation, it will get a 1-Star rating and a 3-Star rating means it's trading broadly

in line with our valuation.

All visitors to Morningstar.co.uk can see our Star ratings for stocks under our analyst

coverage. Only premium member have access to our analysts share price valuation and

accompanying research report. Premium members can click on the 'Morningstar Research' tab

of any stock under coverage such as this one of Centrica to read our analysts' investment

thesis, economic moat assessments, share price valuation, risk factors and insights into

the company's management.

If you are not a premium member, you can get instant access to all our analyst research

when you take a free 14-day trial. Morningstar research on stocks and funds provides you

with an independent analysis to help you make better investment decisions and achieve your

financial goals. In the next video we are going to look at Morningstar's editorial content

including written articles and videos and how to search for specific news.