Part 4. 3rd Party Fund Evaluations
Morningstar is a well-known 3rd party rating agency specialized in mutual fund/ETF research. Its rating system may suffer from controversy, but it does no harm for investors to get more information, especially when an investor has no capability to do the research on his or her own. A 3rd party’s rating could work as a piece of puzzle that constitutes your overall understanding of mutual funds.
There are two well known Morningstar fund appraisals
1. Morningstar rating
The Morningstar rating system sorts every fund by its Morningstar score which is calculated based on the fund's past return and risk information. Then the top 10% of the funds are assigned a “5-star”. The following 22.5% of funds are “4-star” as shown in the picture below.
This is a more prevailing method that being cited by lots of major financial websites as part of a fund’s basic profile.
The following picture is an example of ACLOX. As showing in the picture, the vertical axis is the relative market cap from “micro to giant”. lower the risk. The horizontal axis evaluates the mutual fund’s investing attributes ranking from “Deep value to high growth”. A simple interpretation of the style box is that, the larger the market cap and the closer the fund to the “value” position, the lower the fund's risk.
In the last part of our blog series on mutual fund 101, we will discuss several other things you should investigate before investing in a fund.