Morningstar Australasia is scrapping its controversial use of algorithm-driven ratings in Australia next year and confirmed all ratings will now be provided by human analysts.
From 31 March 2026, the rating house will withdraw Medalist ratings based on algorithm-driven people, process and parent pillars in Australia based on client feedback.
Instead, all ratings will be produced qualitatively by Morningstar’s analysts which it said is expected to expand the coverage breadth of qualitatively rated funds, something that had been requested by advisers.
In a statement from Matt Olsen, director of manager research at Australasia, he said: “Client feedback and market analysis have made it clear that Australian investors and advisers most value the insights and qualitative expertise of Morningstar’s analysts. We remain committed to empowering investor success by providing meaningful insights.”
Olsen told Money Management it had introduced the algorithm-driven process around two years ago and that no analyst jobs had been lost at the time. With the decision to expand the volume of funds rated quantitatively, further hires are likely in due course to meet this increased coverage.
The decision to use algorithms had received mixed feedback since it was introduced, especially at a time when research houses are under scrutiny from ASIC around their ‘gatekeeping’ for funds targeted at retail and wholesale investors as well as SQM Research being sued over alleged failures regarding ratings of the Shield Master Trust.
Meanwhile, the firm will also move to issue Issuer Initiated Ratings where fund manager or financial product issuers in Australia and New Zealand will pay a fee to Morningstar for the preparation of a Medalist Rating. This model is specific only to this market, it said.
Peter Bryant, managing director, enterprise products, Australia, said: “Morningstar’s mission is to empower investor success. This model will allow us to continue to grow the capability and capacity of our team. By listening to our clients and evolving our business model, we’re ensuring our ratings are transparent, and aligned with the way investors and advisers make decisions.”
Finally, it has updated its Morningstar Medalist Rating methodology to improve transparency and simplify the rating structure.
This will introduce the Morningstar Medallist Rating Price Score from –2.5 to 2.5 which will clearly reflect whether an investment’s fee is a liability or competitive advantage, impacting a product’s overall rating.
This round of changes will also introduce a simplified structure, meaning that funds are evaluated against their Morningstar Category average rather than a benchmark to help investors more easily identify medalist options within a category and make comparisons between funds easier.
To improve the stability of ratings, Morningstar said fund ratings will be determined by a combination of fundamental pillar ratings – people, process, and parent – and their Morningstar Medallist Rating Price Score to eliminate forced distribution ratings that currently see fund ratings shift based on updates to other funds.
While it prepares to roll out these changes, Morningstar said its five-tier rating scale will remain the same with gold, silver, bronze, neutral and negative.
