As we have done in the past, we are making some changes to the mutual fund categories that are used in our various products. It is important to note that the changes do not affect the functionality of your product in any way. Rather, they make some of the data points in our products more useful.

Changes in mutual fund categories are nothing new to Morningstar. In past years we -- along with the rest of the industry -- have made changes to the fund categories that reflect the evolution in the mutual fund landscape. This most recent upgrade is more significant than those made in years past but we believe these changes will serve our clients and all investors better. The new categories will help improve the quality of various statistics that we publish.

You may have noticed instructions for submitting feedback. This invitation is open to any interested parties -- fund companies, financial advisors and, of course, investors. We are seeking feedback on the list of category membership for the new categories. The feedback we receive through this channel will be taken into consideration before we implement the new categories in our products. The changes we make will appear when you update your product in October, for the periods ended Sept. 30.

What are mutual fund categories and why are they important?

Mutual fund categories are like organizing bins for the 5,000-plus mutual funds available to Canadian investors. We place funds into peer groups based on how they invest. Thus if you want to purchase a fund that invests in Canadian stocks, you can look through all funds in the Canadian Equity category rather than scouring the whole universe of mutual funds in search of a fund that invests primarily in Canadian stocks.

However, the categories serve another important function. All of our comparative statistics (such as quartile rankings and the Morningstar Rating) depend on the mutual fund categories. Quite simply, when you compare one fund to a group of its peers, the comparison depends on what you consider a “peer.”

The changes we have made to the categories make for more relevant peer groups and, in turn, this makes the quartile rankings and Morningstar Ratings even more useful to investors.

Why did Morningstar change the categories?

We have made changes, in concert with the industry, regularly over the past seven years to the mutual fund categories to keep up with the evolution of the financial landscape in Canada. Many of these previous changes may have gone unnoticed by our clients since they were less significant. Since Morningstar is committed to continual improvement, we have been reviewing the categories and discussing ways to improve them for several months now. After this review we felt a more significant change to the categories was due than in past years.

How exactly have the categories changed?

We have published an article that explains the changes. (To view this article click here.)

What do I tell my clients?

It's entirely up to you. We understand that many investors will not be concerned with the nitty-gritty details of the changes. Meanwhile, other investors will be anxious to know the details of these changes. Overall, though, it's important that investors realize that they are better served by the new categories.

Should your clients want to know more, articles will be published on www.morningstar.ca in the coming weeks to help everyone understand the changes. Meanwhile, the documentation currently available at www.morningstar.ca/categories is extensive and should answer even the most detailed questions.