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Morningstar Releases Policy Proposal for the Presentation of Past Fund Performance Post-RDR

Morningstar UK Ltd, a subsidiary of Morningstar, Inc., (NASDAQ: MORN), a leading provider of independent investment research, today released its Policy Proposal paper ‘Presentation of Past Performance Post-RDR’. The paper outlines the company’s proposed solution to the challenge of presenting historical fund performance, given the launch of new, commission-free share classes being introduced to investors under changes required by the Retail Distribution Review (RDR).

The Retail Distribution Review, due to come into effect on 1st January 2013, has already seen the launch of over 750 commission-free share classes*. As this number grows, it brings the challenge of how Morningstar and other providers of investment information will present historical fund performance that accommodates both existing, pre-RDR (commission-loaded) share classes and new, commission-free share classes.

The issue has been at the centre of discussions across the industry and at Morningstar for many months. In September 2012, Morningstar gathered industry representatives to discuss the options available, where it was clear that opinion among participants was divided. In its resulting Policy Proposal paper, Morningstar evaluates two options available to meet the challenge of presenting historical fund performance going forward, offers the company’s proposed solution, and presents a detailed decision tree for its implementation.

“An industry-wide consensus is urgently needed on the handling of performance history for investors to fully benefit from forthcoming regulatory changes”, said Andy Pettit, Morningstar’s director of data and research strategy for global funds. “With both pre-RDR and post-RDR share classes now existing, it is no simple matter to determine a way to present historical fund performance that is both systematic and consistent across the fund universe going forward. We believe our solution gives investors the clearest possible view of how their investments have performed through time.”

Morningstar proposes to manage the presentation of historical fund performance post-RDR by appending the past performance records of existing fund retail classes to those of the new RDR share classes—thereby retaining the impact of the higher fees of existing classes. Morningstar believes this presentation truly reflects what investors actually experienced.

“For 28 years, Morningstar’s mission has been to help investors make better decisions, which means creating products that offer investment information that is clear and easy to understand. In formulating our solution to the problem of presenting historical fund performance post-RDR, we kept this mission firmly front of mind,” Pettit said.

*To date, Morningstar has received notification of 768 newly released commission-free share classes from fund management companies providing open-end investment fund opportunities to investors in the UK.