Morningstar's Curious Negative Ratings
June 1, 2012
Is anyone in the market for a 4-star, negatively rated fund?
In November 2011, Morningstar rolled out a new forward-looking analyst ratings system for the U.S. funds it covers. Funds will now be rated on a predictive five-point scale from "Gold" to "Negative," in addition to Morningstar's flagship star rating, which looks at a fund's past risk-adjusted performance.
According to Morningstar's breakdown of its star ratings system, funds are ranked within their categories according to their risk-adjusted return, after accounting for all sales charges and expenses. Stars are assigned such that the distribution reflects a classic bell-shaped curve with the largest section in the center. The 10% of funds in each category with the highest risk-adjusted return receive five stars, the next 22.5% receive four stars, the middle 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star.
Then in April, Morningstar doled out negative ratings to two 4-Star Nuveen funds: Nuveen Tradewinds Global All-Cap A and Nuveen Tradewinds Value Opportunities A. According to Morningstar's new ratings glossary, a "Negative" rating means the fund that has at least one flaw likely to significantly hamper future performance and that is considered by analysts an inferior offering to its peers.
"A cloud of uncertainty hangs over Nuveen Tradewinds Value Opportunities,'' according to an analyst report. "Dave Iben, this fund's lead manager since its 2004 inception, announced that he will leave Tradewinds with three analysts by the end of June 2012. The departures are a major loss for the fund and the firm ... Unfortunately, there is no natural successor at this fund or within the firm."
So will Nuveen's negative ratings now affect its star ratings?
Not so fast, according to Russ Kinnell, director of fund research. He said one system has nothing to do with the other because the star rating system is based on past performance. The new ratings are derived from forward-looking projections "so the analyst rating has no impact on" Nuveen's star ratings.
"If they were perfectly in sync there would be no point in having both of them. I think there were some initial confusion but people are pretty past that. We're getting strong feedback and people like the fact that we're giving more guidance," he offered.