Tacitly admitting its five-star rating scale for mutual funds is no longer enough, this week
has begun offering a handful of "Analyst Picks" for each of its 50 fund categories.
These new picks, similar to
Standard & Poor's
nascent "Select Funds" short lists, are another indicator of investors' desire for a manageable menu of options distilled from the more than 7,000 available funds.
"Investors are simply overwhelmed by the number of funds out there," says Jim Folwell, a consultant at Boston fund researcher
Russell Kinnell, the senior Morningstar fund analyst directing the new rating effort, agrees. "We're simply trying to give people a smaller list of funds to start their search. People just can't sit down and read 1,000 pages of fund analyses," he says.
The first group of five recommended mid-cap blend funds went up this week on Morningstar's
Web site. Each week, a new category's picks will be added until all 50 categories have been covered.
Kinnell says his firm's 25 fund analysts will make picks according to their own ideas of what makes a good fund. Factors will include management tenure, style consistency, fund expenses and performance. The picks will be monitored on an ongoing basis, but there are no set criteria for removal.
Although Morningstar analysts write semiannual analyses of many funds, the qualitative rankings are a break from Morningstar's star and category ratings systems, which are based strictly on portfolio and performance statistics.
S&P started a similar rating system in March, blending qualitative opinions with quantitative screens to pick a limited number of winners. S&P picks roughly 5% to 10% of funds in each category, highlighting as few as three and as many as 54. Officials at
, another major fund-ranker, say the firm has no plans to implement qualitative rankings.
As the number of mutual funds has grown to more than 7,300 in 1998 from 505 in 1978, Morningstar's ratings have left investors to sift through more than 1,900 top-rated, four- and five-star funds. A more specific category rating compares funds in smaller groups, but large categories can still leave investors with more than 100 highly rated funds.
Adding a qualitative component to numbers-driven rankings is helpful and necessary, fund-watchers say. "You need to look behind the numbers to look to style drift, tax exposure and other risk factors. You need to look behind the performance screens to see if the wizard is doing what he's supposed to," says Bruce White, a private money manager with
in Pasadena, Calif.
Besides, say financial planners and brokers, there are limits to the number of funds anyone can follow.
"I think most advisers end up using a small number of funds, around 25, because that's how many they can track effectively," says Bob Mooring, a Miami-based financial adviser.
Philip Edwards, who directs S&P's fund-rating group, says his firm's fund reports are available to individuals, but are designed to help advisers focus closely on a small number of funds. "With thousands of funds, where do you start? You need a way to whittle funds down to a smaller group of funds that you can get your arms around," he says.
Cliffs Notes, these short lists of funds can leave some important details out.
Although both Morningstar and S&P stress to investors that their ratings are a starting point and not a decision-maker, many investors may nevertheless use these short lists as buy lists.
"Too often, the individual investor sees a good ranking and ends up chasing last year's top fund and getting this year's worst," says Clifford Associates' White.
"I can see clients going to that site and just buying those five funds, based on Morningstar's great reputation," Mooring adds.
Still, says Cerulli's Folwell, Morningstar's "picks might not necessarily be any better than anyone else's."
He might be right. Kinnell's first crop of picks might be a good testing ground for that theory. The Morningstar and S&P mid-cap blend select lists have no funds in common.