Morningstar System – Definition

Cite this article as:"Morningstar System – Definition," in The Business Professor, updated December 10, 2019, last accessed September 26, 2020,


Morningstar System Definition

Morningstar is a financial service firm that provides investment research and investment management services.

It has a technology platform providing software as a service and research application for financial advisors.

The primary Morningstar systems are:
  • MorningstarĀ® Annuity IntelligenceA research tool to help simplify complex annuities, including coverage of fixed indexed and fixed annuity products.
  • MorningstarĀ® ByAllAccounts – A data account aggregation service to help track client holdings, dividends, and returns.
  • Morningstar Credit Ratings, LLC – Credit ratings and analysis that cover asset-backed securities, commercial and residential real estate securities, and corporate and financial institutions.
  • MorningstarĀ® Data – Global equity, managed investments, and market data from all major global exchanges with flexible distribution options.
  • MorningstarĀ® Data for Commodities – A suite of data management products for easier analysis of research and data in the commodities and energy sectors.
  • Morningstar DirectSM for Asset Management – A web-based institutional investment analysis platform built to help asset managers create, select, and market investments.
  • Morningstar DirectSM for Wealth Management – A web-based investment analysis platform for wealth managers to research investments and communicate between teams.
  • MorningstarĀ® Enterprise Components – Configurable, ready-to-integrate enterprise software tools for research, portfolio analysis, and retirement plan management.
  • MorningstarĀ® EssentialsTMA toolkit for marketers to enhance their programs with industry-standard statistics and ratings recognized by investors and advisors worldwide.
  • Morningstar Fiduciary Services – A service that helps mitigate the risk and responsibility that comes with building retirement plan lineups.
  • MorningstarĀ® Indexes – Indexes for benchmarking and building products, developed with our research and providing exposure across asset classes.
  • Morningstar Investment Research Center – Comprehensive resources to help members of your library community research and grasp investment opportunities.
  • MorningstarĀ® Managed PortfoliosSMMutual fund, stock, and exchange-traded fund portfolios offered through fee-based financial advisors, built for the long term.
  • Manager Selection Services – Helping firms select managers and analyze investments to help mitigate compliance risk.
  • Morningstar Premium – The investor source for timely analysis on stocks, funds, and markets, plus tools for portfolio management.
  • Morningstar OfficeSM Cloud – A web-based portfolio and practice management platform for independent financial advisors, with performance reporting and back-office services.
  • PitchBook – Research and data on companies, deals, funds, investors, and service providers across the entire private investment lifecycle.
  • MorningstarĀ® Plan AdvantageSMAn online platform for advisors to onboard new retirement plans, access provider pricing, and offer investment lineups.
  • Morningstar Reporting Solutions – Create marketing materials, regulatory documents, and other custom reports using our tools or outsource the process to us.
  • MorningstarĀ® Retirement ManagerSMAn online service offered by employers to help their employees save and invest in their workplace retirement accounts.
  • MorningstarĀ® Total Rebalance ExpertĀ® – A tax-aware rebalancing service used to maximize tax savings for clients, aligning allocations on personal factors and market changes.
  • Morningstar Research – Independent, comprehensive evaluations on equities, funds, and managed investment products.

References for Morningstar System

Academic Research on the Morningstar System

MorningstarĀ ratings and mutual fund performance, Blake, C. R., & Morey, M. R. (2000).Ā Journal of financial and Quantitative Analysis,Ā 35(3), 451-483. This study reviews the Morningstar rating system. It examines it as a mutual fund performance predictor for the U.S. domestic equity funds. Morningstar rating systemā€™s predictive abilities are compared with alternative predictors. After the review, the result shows that findings over different samples, fund styles, ages and measures of performance are robust. Firstly, relatively poor performance from Morningstar indicates low ratings. And secondly, little statistical evidence shows that the highest Morningstar’s rated-funds outperform the next-to-highest and median-rated funds. And thirdly, at best, Morningstar ratings only do a little better than other predictors that are alternatives in forecasting funds for future performance.

An anatomy ofĀ MorningstarĀ ratings, Blume, M. E. (1998). Financial Analysts Journal,Ā 54(2), 19-27. By using a one to five stars rating system, the investment performance of mutual fund was rated by Chicago-based Morningstar Inc. firstly, the method used by Morningstar in assigning these widely circulated ratings is what this article documents. It is then established that: (1) funds with a short history is more likely to receive the top rating of five stars than funds with a long history and; (2) almost half of the no-load, diversified, domestic equity funds get a four of five starts rating by Morningstar whereas just a little more than a quarter of these funds gets one or two stars.

Mutual fund age andĀ MorningstarĀ ratings, Morey, M. R. (2002). Financial Analysts Journal,Ā 58(2), 56-63. In the Morningstar mutual fund rating, age bias is reviewed. It was discovered that consistently, the average overall star ratings of seasoned funds are in lots of cases, much higher than the average overall star ratings of younger funds. This bias is of the methodology Morningstar uses order than a survivorship bias. The age bias of the Morningstar ratings is of significance to the industry of the mutual funds and investors if the star rating affects fund flow.

Selectivity, market timing and theĀ MorningstarĀ star-ratingĀ system, Antypas, A., Caporale, G. M., Kourogenis, N., & Pittis, N. (2009). The mutual fund ranking system is evaluated in this paper. Its result shows that higher Morningstar ratings are indeed associated with returns that are higher on the portfolios which include five-, four-, three-, two- and one-star funds only. (STAR5 to SRAR1). Conditional and unconditional portfolio performance is then performed. The evidence suggests, in both cases, that the better performance of the STAR3, STAR4, and STAR5 groups shows a stock selection that is superior rather than market timing abilities. In general, the Morningstar ranking system implies that this is the most effective in identifying the worst-performance funds (STAR1 or STAR2) order than the ones that perform best.

MorningstarĀ mutual fund ratings redux, Morey, M. R., & Gottesman, A. A. (2006). An extensive examination is performed of how new Morningstar rating system, introduced in June 2002, can predict fund performance in the future. Particularly, all domestic equity funds are examined, rated by Morningstar far back as June 30, 2002. The performance of these funds is then examined over the next three years, July 2002 ā€“ June 2005. By using four various performance metrics, load adjustment and three methodologies by which survivorship bias can be handled. Widespread support is found for the impression that the new Morningstar rating system can forecast future performance, within, at least, the out-of-sample first three years.

Morningstar’sĀ New Star-RatingĀ System: Advances and Innovations, Reichenstein, W. (2004).Ā Journal of Financial Planning,Ā 17(3), 40.

Estimation risk inĀ MorningstarĀ fund ratings, Vinod, H. D., & Morey, M. R. (2002). The Journal of Investing,Ā 11(4), 67-75. Regardless of age, the public Morningstar mutual fund star rating system still rates funds. This shows that the approximation that younger fund ratings are based on can have significantly higher estimation risk more than estimates that lower ratings are based on. Thereā€™ll be some less confidence by the investors that the ratings of younger funds are truly the estimations are. In an investigation of 1,281, the point should be clear about international equity mutual funds.

Star power: The effect ofĀ MorningstarĀ ratings on mutual fund flows, Del Guercio, D., & Tkac, P. A. (2001).Ā  (No. 2001-15). Working Paper, Federal Reserve Bank of Atlanta. An event study methodology is applied on over 10,000 Morningstar rating changes, and it is discovered that Morningstar has a huge independent influence on the allocation of investment decisions of small scale mutual fund investors. What drives flow is the discrete change in the star rising and not the underlying performance measure. Statistical and economic significant positive abnormal flow is documented, and this follows the following rating upgrades, downgrades of negative abnormal flow rating. Contrary to the cross-sectional flow performance paper, the evidence is found immediately in the month of the rating change.

Improve yourĀ MorningstarĀ rating using options, Crowley, P. (2001). The Journal of Investing,Ā 10(4), 73-87.

On the role of risk in theĀ MorningstarĀ rating for mutual funds, Lisi, F., & Caporin, M. (2012). Quantitative Finance,Ā 12(10), 1477-1486.

Estimation Risk in Mutual Fund Ratings: The Case ofĀ Morningstar, Morey, M. R., & Vinod, H. D. (2001). In this paper, the relative risk in a very public Morningstar mutual fund star rating system is examined. It is shown that because of using a system that rates funds irrespective of age differences, a situation where the approximations upon which younger funds ratings are based is created by Morningstar, and they have great higher estimation risk over the estimates on which the ratings of earlier funds are based. This results in investors been somewhat less confident that young funds ratings are indeed what they are estimated to be. Our point is investigated by 1281 equity mutual funds.

The ranking properties of theĀ MorningstarĀ risk-adjusted rating, Chiang, K. C., Kozhevnikov, K., & Wisen, C. (2003). The ranking properties are examined by the system of the Morningstar risk-adjusted rating (RAR). It is discovered that from the CAPM regression, both the RAR and the excess return yield similar rating star. We document, in contrast, systematic differences between the star ratings that is produced by the RAR and excess return approximated from the Fama-French [1993] three-factor model.Ā  Almost 77% of domestic equity funds that has a ten-year five-star Morningstar rating that does not maintain their five stars following the null hypothesis of the Fama-French three-factor model.

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