Morningstar on July 1 will change the way it calculates mutual fund ratings, ranking funds within much narrower peer groups. It will use nearly 50 categories, compared with the four broad asset classes used now (domestic stock, international stock, taxable bond and municipal bond). The new ranking system also will move to portfolio-based analysis and an enhanced risk-adjusted return measure that accounts for all variations in a fund’s month-to-month performance and puts more emphasis on downside risk.
Mutual funds will continue to be ranked between one and five stars, based on three-year performance, and historical star ratings will not change.
