Morningstar Announces New Target-Date Fund Series Rating and Research Reports

Chicago, IL - 28 May 2009

Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today said it will launch ratings and in-depth research reports for target-date fund series. Target-date funds are designed to help investors prepare for retirement, and typically invest more aggressively in the decades before retirement and shift their asset mix to become more conservative in the years immediately preceding and following retirement.
“Target-date funds have come under scrutiny in recent months. Disparity in the performance in 2008 among funds with the same target-date caused many to second guess the funds’ investment policies and strategies, leading to the joint hearing before the SEC and the Department of Labor next month,” said John Rekenthaler, vice president of research for Morningstar. “Surprise about these variations in performance reveals the lack of knowledge about this new, fast-growing category of mutual funds. Morningstar’s upcoming research reports and ratings will make target-date funds more transparent, and will help investors make meaningful comparisons and informed decisions when evaluating a target-date fund.”

Morningstar’s target-date fund series ratings and research reports use two qualitative and three quantitative measures and a holistic, peer-based approach to analyzing target-date funds. The five components evaluated by Morningstar analysts are People, Parent, Performance, Portfolio, and Price. A fund series can receive a maximum score of 20 points for each component. Based on the aggregate scores of the five components (with 100 points being the maximum), each target-date fund series earns one of five ratings: Top, Above Average, Average, Below Average, or Bottom. Morningstar will review and update the ratings annually.
Each research report will contain detailed commentary by a Morningstar fund analyst on all aspects of the scoring, as well as additional analysis of non-scored aspects of target-date funds’ structure and components.
Qualitative components:
People
• Examines the fund series’ management team and how well Morningstar thinks they’ll serve shareholders over the long term, and incorporates factors including management tenure, past performance, and research support.
• Considers the criteria used to determine fund managers’ compensation and whether or not the incentive is to deliver strong long-term returns to shareholders. Also assesses the manager’s financial commitment to the fund through direct ownership of shares.
• Assesses the fund board overseeing the target-date series by determining if the fund board is sufficiently independent of the fund advisor and whether or not the board has consistently acted in shareholders’ best interest.
Parent
• Evaluates whether fund companies consistently put shareholders’ interests first. Fund firms with industry-leading corporate cultures tend to be forthcoming about their investment successes and failures, and stress long-term returns when marketing their funds to shareholders.
• Examines how well fund companies explain how their target-date funds operate to current or potential shareholders in their publicly available materials.
• Notes any regulatory issues at the fund company within recent years. As a baseline standard, Morningstar assumes that a company should be fully compliant with the law; any regulatory breaches are penalized based on the severity of the infraction.
Quantitative components:
Performance
• Assesses how well a series of target-date funds has performed historically relative to its peers on a risk-adjusted basis, taking into account the relatively short performance histories of many series, and assigns a score to each target-date fund series based on a comparison to the universe average.
Portfolio
• Calculates a weighted average Morningstar Rating™ for Funds (the “star rating”) for the underlying holdings in the series to determine the investment quality of the funds.
Price
• Assesses the actual costs investors pay by selecting the lowest-cost share class that has at least 10 percent of the overall assets in the target-date fund series. The net prospectus expense ratios for that share class are then averaged across all of the funds in the series.
• Assigns score to each target-date fund series based on a comparison to the universe average.
“Many investors intend to hold their target-date funds for decades and use them as a primary retirement savings vehicle. It’s critical to invest in funds run by companies that have a strong history of putting shareholders first,” Rekenthaler said.
The Target-Date Fund Series Rating and Research Reports will be available later this year in Morningstar® Principia®, Morningstar® Advisor WorkstationSM Enterprise Edition, Morningstar® Advisor Workstation Office Edition, Morningstar DirectSM, and Licensed Data. Morningstar.com, the company’s Web site for individual investors, will publish the ratings and a modified version of the report.

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