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Who is Morningstar?

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia and Asia. They offer an extensive line of products and services for individuals, financial advisors and institutions. Morningstar is highly respected for their independent investment information. Their strength lies in their independent status, expert research and well tested rating and equity scoring models.

What is the Morningstar Star Rating?

The Morningstar Star Rating is derived from a quantitative method in which mutual funds are ranked on the basis of their historical returns (adjusted for risk and costs) over periods of at least three years. These “risk-adjusted returns” are based on the monthly returns of a fund, where downward variations result in a lower score and a consistently good performance is rewarded with a higher score. Another important aspect is costs, making it more difficult for relatively expensive funds to receive a high star rating. The top 10% of funds in each category receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars and the bottom 10% receive one star.  This Star Rating is calculated over periods of the past three, five and ten years.  If possible, Morningstar will also calculate these ratings for all periods in its Overall Morningstar Star Rating.

What is the Morningstar Analyst Rating?

The Morningstar Analyst Rating is a qualitative assessment that is issued by Morningstar fund analysts. This rating represents a forecast on the future performance of funds relative to peers and relevant benchmarks. In order to issue a rating, the Morningstar fund analysts base their assessment on three pillars: investment team, investment process and fund house. Cost weighted performance is a consideration across all three of these pillars. A rating of ‘Gold’, ‘Silver’ or ‘Bronze’ is attributed to investment funds that are expected to perform better during a future full market cycle than the category average and risk-adjusted relevant benchmarks. The difference between these ratings is determined by the conviction of the fund analyst with regards to the ability for the fund to outperform its peers. Funds that are not expected to distinguish themselves will receive a ‘Neutral’ rating, while funds that perform below par on several levels will be assessed as ‘Negative’.

What is the Synthetic Risk and Reward Indicator (SRRI) rating?

The Synthetic Risk and Reward Indicator (SRRI) was defined in 2009 by the Committee of European Securities Regulators (CESR) with the aim of providing investors with a method of assessing a fund’s risk. The SRRI measures the volatility of the fund. A higher volatility means there is greater uncertainty about the size of the changes in a fund’s value. This means that the price of the fund can change dramatically over a short time period in either direction. A lower volatility means that a fund’s value is not expected to fluctuate dramatically, but to rather change in value at a steady pace over a period of time. The table below shows the mapping between the volatility and the SRRI value. The table shows the differences in percentages that the value of a fund may experience over one year (Annualised Volatility). The percentage is linked to the respective SRRI rating. The more limited the variation is, the lower the SRRI Rating of a fund. The higher the variation, the higher the SRRI Rating. SRRI Annualised Volatility 1 0 – 0.49% 2 0.5 – 1.99% 3 2 – 4.99% 4 5 – 9.99% 5 10 – 14.99% 6 15 – 24.99% 7 25% + The SRRI is calculated based on the fund returns over the last five years. If a fund is less than five years old, the returns of a comparable benchmark is used for the period before the fund was launched.

What are the selection criteria of funds for the Model Portfolio?

Fund Selection Process MeDirect works closely with Morningstar Investment Management Europe (MIME) to define a bespoke fund universe or portfolio of funds to support specific investment goals. The fund selection process is comprised of the following quantitative and qualitative phases: 1. Determining asset allocation Before selecting individual funds Morningstar looks at the composition of the portfolio in terms of stocks and bonds (the so-called asset classes) and examines its geographical and sectorial allocation. This determines the composition of the portfolio. 2. Quantitative Screening Morningstar applies a ranking process that considers the Morningstar Risk Adjusted Return benchmark. Other factors that are taken into consideration are: Performance consistency – if a manager has consistently performed poorly in three out of the last four calendar years, the fund will typically be removed at this stage. Empirical evidence suggests that long term poorly performing funds will continue to perform poorly going forward. Manager Tenure – If a manager has been running a fund for less than three years, they will typically be removed from the selection. Style – If the fund displays erratic changes in style, it will typically be removed at this stage. Currency – If a multi-regional fund search is undertaken, those funds that do not have an offering in the base currency of the intended users will typically be removed from the selection. 3. Qualitative Evaluation The purpose of the qualitative selection methodology is to instil discipline into the manager research process by appraising critical factors that can help determine a fund’s ability to outperform. Funds are evaluated across the five pillars that Morningstar has identified as being helpful in predicting the future success of funds: Parent, People, Process, Performance, and Price. Parent – The culture and structure of an asset management firm can have an impact on its ability to attract and retain talent and its penchant for serving in the best interests of fund shareholders. People – Evaluating the depth and capabilities of an investment team is critical in attempting to identify funds that have a competitive advantage over their competition. Process – Morningstar favours managers who employ a disciplined, consistent, and repeatable investment process. Ultimately, Morningstar is looking for traits that give the investment team an edge over its competition. Performance – The goal is to identify management teams that in the past have demonstrated skill which we define as the ability to outperform their respective benchmark/peer group on a risk-adjusted basis in a consistent fashion. Price – Research indicates that expenses are critical in predicting future fund performance. A fund’s expense ratio should be evaluated within the context of the relevant region and relative to its Morningstar peer group and also consider the trend in expenses and assets in the fund. 4. Portfolio Construction Morningstar firmly believes that asset allocation is a primary determinant of investment returns within a global fund portfolio. Hence, an important consideration for our final selection is how the fund will complement the remainder of the portfolio or select list.


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