What is Morningstar Risk™? | Investing Definitions | Morningstar (2024)

FAQs

What is Morningstar Risk™? | Investing Definitions | Morningstar? ›

The Morningstar Risk rating is an assessment of the past downside risk a fund has exhibited relative to other offerings in its category, as evidenced by its monthly returns.

In the risk rating process, 10% of a category's funds with the lowest measured risk are rated as "low risk." The next 22.5% are rated "below average," the middle 35% are "average," the next 22.5% "above average," while the top 10% are rated as "high" risk.

Morningstar assigns categories to all types of portfolios, such as mutual funds, variable annuities, and separate accounts. Portfolios are placed in a given category based on their average holdings statistics over the past three years. Morningstar's editorial team also reviews and approves of all category assignments.

The Morningstar Risk rating is calculated by taking the fund's Morningstar Return and subtracting its Morningstar Risk-Adjusted Return. The higher the difference between these two metrics, the higher the degree of risk taken on by the fund.

Morningstar Risk is the difference between Morningstar Return (which adjusts for the risk-free rate) and the Morningstar Risk-Adjusted Return (which adjusts for the risk-free rate and the typical investor's risk tolerance, or how they assess the trade-off between risk and return).

Morningstar supports global categories, which map into nine global broad category groups (Equity, Allocation, Convertibles, Alternative, Commodities, Fixed Income, Money Market, Property, and Miscellaneous). Morningstar research teams use a mosaic approach when assigning Global categories.

Risk Tab. Name refers to the name of the fund, including the management company. Morningstar Category is a tool that Morningstar uses to group funds, according to the types of securities in which the funds invest.

A High Rating Is Good, Except When It's Not

With Morningstar Return, however, a higher rating (and a greater number of boxes) is better because a fund with higher returns than its peers may be seen as more desirable.

The Bottom Line. Morningstar acknowledges its rating system is a quantitative measure of a fund's past performance that is not intended to accurately predict future performance. Instead, the company recommends investors use the rating system to evaluate a fund's track record compared to its peers.

Morningstar Rating for Funds

Funds with at least a 3-year record will receive a rating of 1 to 5 stars. All else equal, funds that have beaten most of their peers will receive 4 and 5 stars, while funds that have underperformed will receive 1 or 2 stars.

What does a Morningstar Rating of 3 mean? ›

A 3-star rating means the stock is fairly valued and trading at or close to its fair value estimate. Subscribe to Morningstar Investor to see what companies are trading at a discount.

The Morningstar Rating helps investors assess a fund's track record relative to its peers. It's intended for use as the first step in the fund evaluation process.

Expressed in percentage terms, Morningstar's calculation of total return is determined by taking the change in net asset value, reinvesting all income and capital gains distributions during that month, and dividing by the starting NAV.

Morningstar Risk-Adjusted Return is adjusted for risk by calculating a risk penalty for each investment's return based on "expected utility theory," a commonly used method of economic analysis. Although the math is complex, the basic concept is relatively straightforward.

A 5-star rating means the stock is undervalued and trading at an attractive discount relative to its fair value estimate.

The vertical axis of the style box defines three size categories, or capitalization bands: small, mid, and large. The horizontal axis defines three style categories. Two of these categories––value and growth––are common to both stocks and funds.