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Morningstar Launches Qualitative Research and Ratings for UK Closed-End Funds

Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today launched qualitative research and ratings for closed-end funds—commonly known as investment trusts—in its latest offering to UK investors. The initial launch includes in-depth research and Morningstar Analyst Ratings for 32 closed-end funds. This independent analysis on some of the most heavily subscribed investment trusts will help investors and advisors as they increasingly turn to these investments ahead of the implementation of the Retail Distribution Review in 2013.

Morningstar’s closed-end fund analyst research and ratings draws on the company’s global methodology for fund research used by Morningstar fund analysts worldwide. The methodology considers five key factors—people (manager and support research team), process, parent (including board of directors), performance, and fees. Morningstar analysts also consider the discount at which a fund has traded historically, in order to give context to the fund’s current discount or premium, both absolute and relative. In addition, analysts consider the fund’s use of gearing—one of the key structural benefits an investment trust manager has in his or her tool kit—and review how effectively the manager is utilising gearing in the fund, as well as the riskadjusted performance that it delivers for investors. Analysts also evaluate each closed-end fund’s board of directors for the board’s ability to act independently in the interests of shareholders.

“Our closed-end fund ratings are a key part of our research offering to prepare for the industry’s shift to a fee-based advice model next year,” said Jackie Beard, director of closed-end fund research for Morningstar UK. “We’re seeing clear interest from advisers in investment trusts as they prepare their business for the whole-of-market proposition, and our goal is to support their work with independent and transparent research delivered in a concise report. Throughout 2012 we’ll be adding to our coverage to give advisers a wider understanding of this sector.”

A Morningstar Analyst Rating is awarded to each closed-end fund reviewed. The rating scale is the same as the system used for open-end funds, which was announced in November 2011, and includes:

•  Gold: Best-of-breed fund that distinguishes itself across the five pillars and has garnered the analysts’ highest level of conviction;

•  Silver: Fund with notable advantages across several, but perhaps not all, of the five pillars—strengths that give the analysts a high level of conviction; 2 of 3

•  Bronze: Fund with advantages that outweigh any disadvantages across the five pillars, and sufficient level of analyst conviction to warrant a positive rating; 

• Neutral: Fund that isn’t likely to deliver standout returns, but also isn’t likely to significantly underperform; and

• Negative: Fund that has at least one flaw likely to significantly hamper future performance, and is considered an inferior offering to its peers.

“Morningstar’s introduction of independent, forward-looking qualitative research and ratings for investment trusts will be welcomed by RJ planners,” said Cynthia Pool, director of relationship management and business support at Raymond James Investment Services Ltd. “It is particularly valuable that the research rounds out the ability for our advisers to provide truly vehicle-agnostic recommendations to their clients well ahead of the RDR obligation to do so.”

Ian Sayers, director general of the Association of Investment Companies said, “RDR is a great long-term opportunity for the investment company industry; however, access to research about investment companies is often cited by advisers as a barrier to their recommendation. Morningstar’s launch of qualitative ratings for investment companies is a positive step toward addressing this issue.”