Ashley Redmond: One question that we receive a lot is how do we assign ratings to a fund? Here to discuss the process is Director of Fund Analysis in Canada, Christopher Davis.
Christopher, thanks so much for joining me.
Christopher Davis: Thanks for having me.
Redmond: So, how do you decide what funds to rate and how do you distribute the workload?
Davis: Well, we aim to cover the biggest funds and the best funds. We cover the biggest funds because they are most relevant to investors. Obviously, we want our coverage to be where the investors are. But we also want to be where investors are going to be. And so, we look to identify up-and-comers, and to identify funds that investors should be investing in.
Redmond: How is the workload distributed?
Davis: Well, we generally distribute our workload by fund family. One of our intrinsic advantages, we believe, at Morningstar, is that we understand fund companies better than anybody else. So, in order to paint a portrait of that fund company, you've got to cover a lot of different funds across their line up, and it's really helpful if one person or two people cover a fund company. So, that's one way we distribute it.
Another thing we ensure is that there are subject matter experts in more esoteric or niche asset classes. For example, we have an emerging markets specialist; we have analysts that like to specialize in bond funds because bond funds and equity funds behave a lot differently. There's terminology and a lot of technical differences between fixed income analysis and equity analysis, so we try to also recognize that in our process.
Redmond: Okay, and what's the analyst research process once you have decided on a fund?
Davis: Well, once we decide on a fund, it's up to an individual analyst to do their homework. So they use – in addition to public filings, they look at our very extensive database and they review the portfolio holdings, and they try to understand how a fund has behaved historically. Using that research, they talk to the portfolio manager for an hour, or an hour and a half. Additionally, often we'll talk to risk managers, CIOs, the CEO of firms to understand the whole investment culture and how that fund manager fits within it.
Once an analyst does all of their research, they come to a conclusion, they come up with a qualitative rating, and then they sit before the Fund Analyst Ratings Committee. So, it's all of their fellow analysts sitting down, quizzing them, grilling them on what their thesis is, and ultimately challenging them. Each analyst has a devil's advocate for each fund to make sure that the hard questions get asked. Then the ratings committee comes to a consensus and chooses a rating for the fund.
Redmond: So the ratings committee is really how your team vets the analyst decision and also vets the process.
Davis: Absolutely. So, no analyst operates in a vacuum. We make sure that analysts are ready for this meeting, and ready to defend their view point. Then, after that, it's the analyst's job to put it in writing. Everything they do is peer reviewed. We also have quantitative analysis on their written review to make sure that all the data they cite is absolutely accurate.
Redmond: Thanks, Christopher.
Davis: Thanks for having me.