Why Morningstar is better than Value Research for mutual fund investing

Published: December 7, 2015 at 6:53 pm

Last Updated on December 29, 2015

Here is why I think Morningstar India is better for mutual fund investing – selection, review and analysis – than Value Research India.  I am not affiliated with either portal in any way.  This post is to encourage readers unfamiliar with the features of Morning Star to explore them in peace – without any transaction in mind.

Before I forget, on a side note, those who would like to understand different product categories and differences in investment mandates can explore the website of Franklin Templeton mutual fund (in peace).

Mutual funds can be analyzed in two ways:

quantitatively – with NAV and benchmark history alone, treating the fund like a black box.

qualitatively – by looking at the portfolio, studying the style of the fund management team, the source of alpha etc.

Read more: Quantitative vs. Qualitative Mutual Fund Analysis

Star rating is a quantitative analysis and both portals have a similar rating methodology.

Morningstar has something known as “analyst rating” – gold, silver, bronze – which is based on qualitative metric. Although Morningstar claims that these are ‘forward-looking’ ratings compared to star ratings which are ‘backward-looking’, both analysis use only past performance (what else can one do?!). The only drawback is that these analyst ratings are done by humans (duh!) and therefore they are only available for some funds.

Personally I do not use mutual fund star ratings, but for those who want to, Morningstar is a better resource in more ways than one.

  1. The analyst ratings can be used along with star ratings for a more comprehensive review. This is important because, there are 5-star funds with a bronze rating and a 3-star fund with a gold rating.
  2. The risk & ratings  tab in each morningstar fund page is simply awesome. It offers you 3-year, 5-year and 10-year (a) return grades, (b) risk grades and (c) star rating. This is a quick way to determine consistency in past performance.

 

Morning-Star-Rating-History

Why I do not like star ratings:

The risk & ratings tab also provides risk-adjusted return metrics like beta, Sharpe ratio etc. for 3-year, 5-year and 10-year periods.

To learn more about these metrics: Visualizing Mutual Fund Volatility Measures

If you are comfortable with these metrics, you can screen mutual funds based on returns with the mutual fund screener, create a shortlist of about 5-6 funds and then look for consistent risk-adjusted performance at Morningstar. In comparison, Value Research does not even mention the duration over which these metrics are calculated.

If you do not like these metrics because they are difficult to understand or because you think they are not valid (since markets do not follow normal distribution –Value at risk (VAR): Would you buy a car with a faulty airbag!), then you can consider using downside protection as an alternative:

Mutual Fund Analysis with Upside and Downside Capture Ratios

Downside capture is a measure of how efficient the fund is protecting investors when its benchmark falls. Upside capture provide the opposite information. Take any old fund which has done well and it would have suffered lesser losses than the benchmark.  Consistent downside protection is the source of alpha.

Morningstar provides Downside and Upside capture ratios for 3-year, 5-year and 10-year periods. Lower the downside capture, the better. Higher the upside capture the better.upside-and-downside-1

 

 

 

 

 

 

 

 

 

Alternatively, you can also consider using my downside protection calculators:

Mutual Fund Downside Protection Calculator

Mutual Fund Downside Protection Consistency Analysis (graphical analysis)

If you now head over to the portfolio tab at Morningstar, you can find in-depth information of the holding style and more importantly holding style history. This will help us understand the  correlation between fund size and holding style.

Morning-Star-Syle-Box

 

 

 

 

 

 

 

 

 

 

 

 

This information is not available at VR. Its style box only gives you information about the dominant holding style.

The detailed portfolio tab at Morningstar gives the entire portfolio (unlike VR) along with the date each stock was acquired. This can be used for understanding the investment strategy better.

The history tab of Morningstar contains asset allocation, equity style and stock sector histories. This can help understand how the fund management reacted to market movements.

Morningstar-india2

In conclusion, MorningStar is a much better source for mutual fund analysis than Value Research. This is not about simplicity. Both portals have the same metrics. If you can navigate VR, you can navigate Morningstar.

Morningstar scores because it realizes the importance of reporting those metrics for different durations.

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
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