When choosing an investment fund among the multitude of products that a participant can find, . In recent years, the multiplicity of funds available for sale in Spain for the investor, both in their financial institution and through different platforms, has made it more necessary than ever to have some guarantee that the investment vehicle complies certain requirements, regarding the consistency of its performance and in the assumption of risks. There are other fund analysis firms that also give their notes, but Morningstar has managed to turn its stars into a standard in the financial sector, so much so that they are already a synonym for the good work of the manager, and stands out in advertising.
There are not so many funds that can boast of having this award. To give an example, of the 2,960 variable income funds available for sale in Spain with class in euros, only 57% have such a precious trophy on their shelves, of which only 124 have five stars, the highest rating ( 360 funds have four stars and 577 funds have three stars). It has its explanation. This note is based on exclusively quantitative criteria, such as the fund’s performance and risk data obtained in certain time periods, apart from taking into account the commissions applied by the product. Monthly data is used for its calculation.
few stars
Only the best 10% of funds in a category receive five stars, the next 22.5% four stars, the next 35% three stars, the next 22.5% two stars and the bottom 10% receive only one star. . This note is also at a European level, that is, it takes into account all products in the same category regardless of the country in which it is distributed. And an average is made with the qualification achieved in the different time periods, depending on the life time of the product.
“There are situations in which it is impossible to establish a rating: for example, when the life of the fund is less than three years, when there is insufficient information for the fund to be included in one of the Morningstar categories, when the fund has suffered significant changes in their investment strategy and their historical performance data are therefore not as relevant, or when there are not enough similar funds to establish a classification”, explains Fernando Luque, senior editor of Morningstar Spain.
In the , made up of 34 funds, only five products have five stars: Metavalor, Caja Ingenieros Iberian Equity, Fidelity Iberia, Gesconsult Variable Income and Santander Small Caps. Fifteen funds in this classification have four stars, seven funds with three, seven funds with two and three with one star, which are Okavango Delta, Azvalor Iberia and Trea Iberian Equities.
In the one in which 180 funds participate, only nine can boast of displaying five stars in their advertising brochure and only 23 have four stars. In fact, only 111 products have a star, of which 33 have two or one. These figures give an idea of how difficult it is to achieve these stars, despite the fact that they are the most actively managed investment funds, uncorrelated with their reference indices.
But when deciding on one fund or another when adding it to the portfolio, simply looking at these stars as an omen of what they can do in the future is not a good idea. First, because past returns does not mean that they will be able to match or exceed them in the future, because the behavior of the markets is unpredictable, as you are seeing at the beginning of the year. This quantitative note serves more as a school bulletin reminder that the manager has been able to weather the markets in recent years and outperform his competition.
But there is an alternative that not all investors know about or use more frequently. They are the Morningstar medals (gold, silver and bronze, among the positive ones), which try to contextualize the probable behavior of a fund in the future. They are based on the Morningstar Analyst Rating, a qualitative analysis tool that the firm has used since 2011, which tries to identify those funds that its analysts think should do better than their competitors and the benchmark index in the long term, taking into account account the risk assumed, in which commissions are once again a decisive factor. The fund’s past performance has little weight in the final grade.
In fact, among the factors that are most valued are the fund’s talent recruitment and retention, the manager’s organizational strategy, the alignment of interests with the fund’s investors and regulatory compliance.
Each fund is supervised by an analyst, who also takes into account the accessibility of the management team and the availability of class for the retail investor. The grade it gives is discussed later by the analysis team. The fund’s expenses are so important that it can happen that one class of the fund has a note and another does not, precisely because of the difference in price.
To what extent has this tool been useful? A study by Morningstar in 2017 showed that in equities the Gold, Silver and Bronze funds had “significantly outperformed after accounting for expenses and common factor exposures.” Medalists continued to outperform in the mixed asset class, while in fixed income “our methodology ranked the Silver, Bronze and Neutral funds well, but not so well the Gold funds,” they note.
If both criteria were crossed, the funds with the most stars and the funds with the best medals, the result would offer “the best possible combination2”, assures Fernando Luque, although “it does not guarantee that they will be the most profitable”, he stresses, but “a In the long and medium term, those with medals perform better than the average for their category”.
With this combination, the possibilities of choice for a Spanish investor are reduced much more, as can be seen in the attached graphs. Among all the variable income funds that have five stars, only one has a gold. This is the Veritas Asian Retail Eur, from the independent boutique Veritas AM, which earns 18% annualized over three years. And only three have a silver: Comgest Growth Europe EUR R Acc, Comgest Growth Japan EUR R and FSSA Japan Equity VI EU, from the firm First Sentier Investors. The bronze is awarded to ten funds, from firms such as Robeco Global Consumer Trends Eqs M and the abrdn Eu Sml Comp A Acc EUR.
Spanish funds
If four-star equity funds are taken into account, there are some more that also have good medals. Seven products have gold, among which is one known to Spanish investors, the Magallanes Iberian Equity M, managed by Iván Martín, which earns 0.71% annualized over three years. With a silver, seven funds appear, some of which have a strategy focused on Asia, such as the Schroder ISF Asian Opports B Acc EUR, the T. Rowe Price Rspnd Asn ex-Jpn Eq I or the Matthews Asia Dividend Fund I EUR Acc .
And among the 18 funds with four stars that have a bronze, there are two other Spanish funds, also old ones known to the investor. This is the EDM-Inversión R and its replica in Luxembourg, the EDM Intern. Spanish Equity R Eur. Another well-known product among this group is Pictet – Global Environmental Opportunities, which earns almost 20% annualized over three years. Funds with a focus on Asian economies also have a place among those with four bronze stars.
They are not the only filters that the inverter can use. Apart from finding the funds that have performed well in recent years and those that can perform best in the medium term, for those who are more concerned about sustainability, a topic that has become fashionable among managers in the heat of the new regulations, Morningstar also has the Sustainability Rating, which measures by balloons the sustainability of the fund’s portfolios, taking into account various social, environmental and good corporate governance factors.
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