Oisin Breen

Agree with the main points of the article.  Any rating system based purely on historical data is going to falter when the market shifts direction...moving into either a bear, or bull, market.

There is a rather simple way to handle this however that I haven't seen tried - and that has to do with the diversification within a given fund and the over/underweights to various sectors.  One could forecast a fund's risk in a market disruption by using a "downside" covariance matrix approach by assuming something simple like a) all sector correlations move towards 1, and b) beta of individual assets within the fund increase by say 50%.  Run a the fund's exposures through this "downside" covariance matrix and you've got a bear market estimate.

Then, based on how over, or under, valued the market is you can forecast a probability of market downside risk occurring at any time.  Use this as a Bayesian adjustment to Morningstar's standard approach.

Maybe the folks at M'star have already played around with this and I'm just unaware, but seems a more robust approach than what's "state of the art" today.

Morningstar jumpstarts its star rating system with favorable self-review yet audit finds it misses the mark in bear markets, supporting claim of dubious predictive value cited by Wall Street Journal

Morningstar

Kunal Kapoor

A look at the numbers shows that exchange traded funds are starting to move in lockstep with RIAs and vice-versa. RIAs invested $496 billion in ETFs in the 12-month period ended June 30, 2015 – that’s a $78 billion increase compared to the same period the year before. By comparison, the wirehouse channel added 20% fewer ETF assets, or $397 billion in the last year; granted, an amount that was $70 billion greater than its aggregate investment during the same 12-month period the year before, according to Broadridge Financial Solutions. RIAs that manage portfolios and make discretionary investment choices for their clients value ETFs because they provide advisors with easy access to market segments at a cheap price – an especially important factor for RIAs who are compensated on an asset-fee basis. Fee-based advisors appreciate ETFs’ tax efficiency, liquidity and broad exposure at low cost. Conversely, RIAs are a prized channel for ETF-makers like State Street, Invesco, PowerShares, Vanguard Group and BlackRock. ETFs are also a major ingredient in portfolios devised by robo-advisors -- essentially automated RIAs -- for the mass affluent who invest more than 90% of their assets using ETFs.

ETFs

The Chicago-based tracker assures investors that its ratings tilt odds in their favor though critics say it's more a gauge of momentum than scientific research.

Morningstar jumpstarts its star rating system with favorable self-review yet audit finds it misses the mark in bear markets, supporting claim of dubious predictive value cited by Wall Street Journal

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Brian Murphy

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