Morningstar fuels fund ratings with AI

Morningstar is using artificial intelligence to power its funds rating process to rate more than 10,000 products.

The research house has launched Quantitative Rating, a machine learning and quant-driven system that boasts the ability to rate funds at six times the rate of a Morningstar analyst based in the US.

The model incorporates the decision-making processes of Morningstar research analysts, their past rating decisions and the data used to support their decisions. It then generates a quantitative rating - positive, neutral, or negative - based on key assessment areas of parent, people, performance, price and processes.

A research analyst would typically assign analyst ratings - gold, silver, bronze, neutral and negative - and going forward ETFs and funds analysed will receive one rating and not both, Morningstar said.

Analyst ratings are assigned to about 1800 open-end and ETFs. With Quantitative Rating, this remit will cover more than 10,000 funds, representing more than 30,000 share classes in the US, it said.

Morningstar global head of manager research Jeffrey Ptak said investors use the new toolkit together with the research firm's existing ratings. It extends the objectives and rigorous analysis Morningstar conducts on thousands of additional funds, he said.

Head of quantitative research Lee Davidson said: "We've trained our machine-learning model to emulate how our analysts make decisions, greatly expanding fund coverage and the proven insights we provide to investors."

"The expansion of our fund ratings with the Quantitative Rating is a great example of our commitment to innovation and leveraging recent advances in technology to further educate investors," Davidson said.

A Morningstar spokesperson said the model will be rolled out in Australasia, although at an unconfirmed date.

In November, Morningstar Australasia received voluntary commitment from more than half of its client base to deliver full investment portfolio holdings disclosure ahead of regulatory requirements.

Morningstar Australasia managing director Jamie Wickham said 51% of the firm's investment management client base has opted for full disclosure. This represents 60% of client assets under management or more than $337 billion.

Wickham said a shift to greater transparency is a positive move for investors. He said it will support greater trust in the industry and enhance analytics for those constructing and managing portfolios.

Currently there is a requirement to disclose the top 10 holdings of a managed fund portfolio and Morningstar has been working with the industry to lift that restriction and better promote transparency.

Read more: MorningstarQuantitative RatingMorningstar AustralasiaJamie WickhamJeffrey PtakLee Davidson
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