In November last year, we launched an enhanced version of our qualitative ratings for mutual funds and issued coverage on a number of funds.
We called it the Morningstar Analyst Rating. The rating is a summary expression of our forward-looking analysis of funds and how we think they will perform in the long term compared to their peers.
Different from the star rating
Unlike the Morningstar Rating for funds (popularly called "star rating"), which is a backward-looking, quantitative measure of a fund's historical performance versus peers (after accounting for risk and costs), the Morningstar Analyst Rating is a qualitative view of our analysts' conviction in a fund's ability to outperform peers over the long term.
The ratings scale is: three positive (Gold, Silver and Bronze), Neutral and Negative, and each rated fund is supplemented with a written analysis outlining our view on it.
As noted in the methodology document, the Analyst Rating evaluates a fund on the basis of what we call the "five pillars": Process, Performance, People, Parent and Price.
This year, we will add another feature to our analyst coverage: a summary scorecard for the five pillars, with each pillar graded as positive, negative, or neutral, to provide even greater transparency around the rationale for the Analyst Rating.
Are Analyst Ratings a buy signal?
While a positive or a Gold rating for a fund reflects our conviction its ability to outperform other funds in the same category over a complete market cycle on a risk-adjusted basis, it does not automatically translate into a buy signal.
The Analyst Rating is not a market call, and it is not meant to replace investors' due-diligence process, notes the methodology document.
"It cannot assess whether a fund is the right fit for a particular portfolio and risk tolerance. It is intended to supplement investors' and advisors' own work on funds," it states.
Similarly, a Gold-rated small-cap fund may not necessarily mean it would outperform a Bronze-rated large-cap fund--as it is not a view on which asset class or sub-class does well over the long haul but simply a view on how it may fare compared to peers within its category.
Indian coverage for funds
In India, we have initiated analyst coverage over 42 equity funds within the Morningstar Large-Cap, Mid- and Small-Cap, and the ELSS categories. Within those categories, the funds under active coverage account for about 59% of assets.
Top Analyst-Rated funds
Out of the total funds under analyst coverage, 9 earn the coveted Gold rating--the best-of-breed funds that distinguish themselves across the five pillars and have garnered the analysts' highest level of conviction.
The number of funds rated Silver and Bronze is 8 each. For the complete list of funds under coverage, click here.
Here's the list of all Gold-rated funds along with a brief summary of the Analyst Report.
DSP BlackRock Equity
Report date: 12 December, 2011.
Fund manager Apoorva Shah's presence is a big reason for the fund's Gold rating.
In our opinion, Shah is an accomplished manager. He is also supported by one of the most able investment teams in the mutual fund industry.
Market sentiment, news flow, and momentum are integral to Shah's investment style. He combines these with his in-depth understanding of stocks with a qualitative overlay to make investment decisions.
Shah's sentiment- and momentum-style approach and its relatively higher allocation to small/mid-caps could, however, lead to above-average volatility, but we are positive on its prospects over the long term.
Read the Analyst Report.
DSP BlackRock Top 100 Equity
Report date: 12 December, 2011.
Another fund managed by Apoorva Shah who has demonstrated considerable skill and is at home with his investment style.
Shah has made the process work across market phases and the long haul. Shah is ably supported by one of the best investment teams in the industry and we think highly of the fund company.
Read the Analyst Report.
Fidelity Equity
Report date: 13 September, 2011.
Over the years, Sandeep Kothari has emerged as one of the best fund managers in the industry.
Kothari follows a bottom-up approach to stock-picking with a keen focus on the risk/reward trade-off. Intensive research is central to his investment style; Kothari works closely with the analyst team to ferret out companies that meet his criteria. He looks for companies with strong balance sheets, sustainable business models, and proven management that are trading at reasonable valuations.
Read the Analyst Report.
Fidelity India Growth
Report date: 13 September, 2011.
Sandeep Kothari's investment style relies heavily on bottom-up analysis. Research plays a key role in stock selection. The fund also lays an emphasis on valuation and risk.
Fidelity India Growth has all the attributes one would expect from a Gold-rated fund: topnotch management, a solid investment process, and an investor-friendly organisation.
Read the Analyst Report.
Fidelity Tax Advantage
At Fidelity, the portfolio manager is at the centre of the decision-making process.
With Sandeep Kothari at the helm, we believe investors have reason to be pleased. He is at home with his investment style and has proved he is able to deliver strong results through time. It also helps that he has strong organisational backing.
Read the Analyst Report.
Franklin India Prima Plus
Report date: 20 September, 2011.
Intensive research is key to this fund's robust investment process, with managers sharing research responsibilities. There is a fair degree of emphasis on qualitative factors.
Fund manager Anand Radhakrishnan favours companies with established track records and strong earnings growth potential. He will typically select companies with strong balance sheets that can generate healthy return on equity and return on capital employed.
Even though the fund has largely stayed in the large-cap territory, the investment approach is distinct and has a rather contrarian approach to it.
Read the Analyst Report.
Franklin India Tax Shield
Report date: 3 March, 2011.
Fund manager Anand Radhakrishnan--supported strongly by a solid investment team--has a bottoms-up approach and has proved to be an astute stock picker. He has tended to spot opportunity before others and buys stocks with a longer-term horizon.
Anand's emphasis on valuations may lead to short-term underperformances, especially in speculation-driven markets, but over longer time frames, when markets experience a cycle, the fund's investment style will hold it in good stead.
Read the Analyst Report.
HDFC Equity
Report date: 12 December, 2011.
Prashant Jain is one of the best managers in the country. We also see his research-driven investment style as strong and well executed.
Over the years, he has seamlessly combined top-down and bottom-up analysis (emphasizing the latter to a great degree) to identify companies with strong balance sheets and business models.
The fund did not do well in 2011 compared to peers as Jain chose to not take cash calls in line with his approach and the short-term underperformance does not change the fund's long-term prospects.
Read the Analyst Report.
HDFC Top 200
Report date: 24 June, 2011.
There are many things to like about this fund, but chief among them are the presence of manager Prashant Jain and his investment approach. Jain ranks among the most experienced managers in the industry and, in our opinion, among the best as well.
Research is at the core of his investment style. Jain's working style is an example of this: He prefers to study hard copies of company disclosures so he can see the footnotes that get lost when data is transferred to electronic format.
Read the Analyst Report.
Notable highlights
Since the Morningstar Analyst Rating evaluates a fund on a number of qualitative measures, you may sometimes find a difference in the fund's star rating (a measure of historical past performance) and the Analyst Rating.
ICICI Prudential Dynamic, the 4-star fund with an impressive historical performance gains a Neutral rating after Sankaran Naren quit fund-manager duties and took over as CIO-Equities for the fund house. The incumbent manager's brevity of track record limit our analysts' conviction. The fund also takes cash calls when it thinks valuations are getting stretched--a strategy we believe is tough to pull off consistently due to the timing risk involved.
In the case of SBI Magnum Tax Gain 93, a 4-star fund, for instance, obtains a Negative Analyst Rating citing lack of ideal execution of investment process and instability in the investment team.
Some funds with not-very-impressive risk-adjusted returns score high on the Analyst Ratings grade. Sundaram Select Mid Cap, a high-risk, high-return offering with a 3-star rating earns a Silver, as our analysts believe that with a competent manager at the helm in Satish Ramanathan, the fund is a strong choice for risk-tolerant investors.
While DSP BlackRock Tax Saver, a 3-star fund gets a Bronze rating, thanks to "our confidence in manager Anup Maheshwari and his investment team's ability," says the Analyst Report.
In other key points, under the Parent pillar, out of those asset management firms whose funds have been rated, HDFC AMC, Franklin Templeton, DSP BlackRock and Fidelity earn the distinction of being described as "one of the best in the industry".
Way from here
In 2012, we look to expand our coverage to include more equity funds and also start rolling out Analyst Ratings for fixed-income and allocation funds.
