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Morningstar revises methodology for ClosedEnd Fund Ratings in the UK


Morningstar UK has introduced revised methodology for the Morningstar Rating for closed-end funds in the UK. The change allows UK investors to more readily compare risk-adjusted performance between all Morningstar-rated funds, regardless of a rated fund’s legal structure.

Notably, the new Morningstar Rating for closed-end funds is now calculated using a fund’s Net Asset Value (NAV), which Morningstar believes enables a superior measure of a fund’s risk-adjusted performance, more fully reflecting the contributions of the closed-end fund manager. Previously, the Morningstar Rating for closed-end funds was calculated using the fund’s market closing price.

In addition, Morningstar now calculates quantitative ratings for all London-listed closed-end funds using the Morningstar Category system, which Morningstar believes provides better relevance and granularity for the analysis of a fund against its true peers, both closed-and open-end funds, including exchange-traded funds.
This is particularly important for those funds with a specialist remit, where their closed-end peer group is insufficient for the calculation of a Morningstar Rating. Previously, Morningstar rated closed-end funds within their Association of Investment Company sectors.

“The changes to our closed-end fund rating methodology are intended to assist advisers in their whole-of-market proposition”, said Jackie Beard (pictured), director of closed-end fund research for Morningstar UK. “Risk-adjusted performance comparisons — on a vehicle-agnostic basis — are now possible, which means investors and advisers can now more readily compare the Morningstar Ratings of investment trusts with those of similar open-end and exchange-traded funds. We wanted to make this change ahead of the industry’s shift to a fee-based advice model, when a greater interest in investment trusts is expected to emerge.”

The Morningstar Rating for closed-end funds is calculated on the fourth business day of each month and is available on the fifth business day in all Morningstar products. The closed-end fund methodology does not adjust for transaction costs.

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