Steve Cole
We are launching enhanced star ratings for mutual funds today. The ratings are a very popular feature of the fund section. With that in mind, and with the number and complexity of new funds and new fund categories increasing, we have decided to revamp our rating system to be a more reliable tool to manage your fund investments.
The algorithm used to determine the ratings is very complex, but it basically rewards funds that do well relative to other funds that are like it. Funds are rated from one star for the worst funds in the group up to five stars for the best funds in the group.
Here are the changes we have made to the rating system:
- Funds are compared against a more specific group of peers. For example, a fund that invests in European stocks is ranked against competitors in the European-equity category instead of the much broader international-growth category. This has the effect of rewarding funds with better stock-picking ability on European exchanges, rather than having the fund's rating reflect the overall performance of European stocks versus other global markets. These peer groups are an industry standard, which is maintained by the Canadian Investment Funds Standards Committee, an independent group that governs fund category classification. Miscellaneous funds, which follow a unique strategy that can't be easily compared to other funds, are no longer given a rating.
- Fund companies often market several versions of core fund. These include structures created for tax reasons like registered and corporate-class funds as well as funds available in special currencies. From now on, only the core fund, from which these versions are derived, is rated, removing duplication and any effect the fund structure may have on the rating. Funds with special characteristics will inherit the rating of their parent fund. A lot of these funds are new and had no rating under the old system. They are now rated based on the track record of their parent fund. Under the old system, currency swings could have a major impact on fund performance and a fund's rating even though the underlying portfolio and manager performance was identical.
- Segregated funds are sold exclusively by insurance companies and have a maturity guarantee or death benefit. Ordinary and segregated funds are now rated separately. We only compare segregated funds to other segregated funds in their peer group.
How will this change your fundlist?
The star rating of a fund in your fundlist may change as a result of the new rating system. We have created a list of funds that received an upgrade or downgrade as well as a list of funds that now receive a rating that didn't before or had their rating dropped.
Historical ratings, which are shown on the ratings tab of fundlist, have been recalculated to retroactively reflect all of the the changes mentioned here. You can still meaningfully compare a fund's current rating against it's rating three months and one year ago.
Do you still have questions?
We've taken a sound process and and updated it to reflect changes in the fund industry in the last 10 years. If you have more questions, you can contact the Globe Investor customer-service team by sending them an email at globeinvestor@globeandmail.com.