Morningstar commits to qualitative research

Morningstarresearch has today acted to deny speculation that it is set to abandon the publication of qualitative research in the wake of the departure of its Australian based chief executive, Graham Rich.

In a statement issued toMoney Management, the research house indicated it would continue to issue qualitative ratings of fund managers and their funds in Australia and New Zealand, despite persistent rumours that it would discard the qualitative component of its research after Rich was dismissed last month by the group’s US parent, Morningstar Inc.

“We are aware of stories in circulation that we are going to abandon our qualitative research. This is clearly not the intention of the management nor the board of directors of Morningstar Research,” Morningstar head of research in Australia Daisy Chee says.

Morningstar’s star ratings process of fund managers in Australia and New Zealand is based on an equal blend of qualitative and quantitative research.

However Morningstar’s rating of the funds management industry in the US is based overwhelmingly on quantitative measures, sparking intense speculation that the Australian operations would follow the lead of its American parent after US based president of Morningstar’s international division, Bevin Desmond, and chief operating officer Tao Huang, were appointed as joint managing directors of the Australasian business.

Chee says Morningstar will look to increasingly integrate Morningstar’s US research methodologies into its local operations following the departure of Rich, but would also continue to meet the expectations of the local market.

The speculation over the future of Morningstar’s qualitative research comes on top of strong scrutiny of its overall star ratings process.

A report released last month by theFrank Russell Companyconcluded that Morningstar’s star rating system was not a reliable indicator of future short-term performance.

The report found that $1000 invested in an average five star rated Morningstar fund between June 1998 and June 2000 would have produced $1460 at the end of the two year period. But $1000 invested in a four star fund would have produced $1588, despite the funds’ lower rating.

Morningstar confirmed last week that it would not push ahead with legal action against Frank Russell over the report. Before his dismissal, Rich had threatened Frank Russell with legal action after describing the report as defamatory and damaging to the Morningstar star ratings model.