Morningstar Rating

Morningstar rates investments from one to five stars based on how well they've performed (after adjusting for risk and accounting for all relevant sales charges) in comparison to similar investments. Within each Morningstar Category, the top 10% of investments receive five stars, the next 22.5% four stars, the middle 35% three stars, the next 22.5% two stars, and the bottom 10% receive one star. Investments are rated for up to three time periods - 3, 5, and 10 years, and these ratings are combined to produce an overall rating. Investments with less than three years of history are not rated. Ratings are objective, based entirely on a mathematical evaluation of past performance. They're a useful tool for identifying investments worthy of further research, but shouldn't be considered buy or sell recommendations.


The Morningstar Rating for investments , commonly called the "star rating," is a measure of an investment's risk-adjusted return, relative to similar investments. Investments are rated from one to five stars, with the best performers receiving five stars and the worst performers receiving one star.

Morningstar adjusts for risk by calculating a risk penalty for each investment based on "expected utility theory," a commonly used method of economic analysis. Although the math is complex, the basic concept is relatively straightforward. It assumes that investors are more concerned about a possible poor outcome than an unexpectedly good outcome; and those investors are willing to give a small portion of an investment's expected return in exchange for greater certainty.

Consider a simple example: an investment expected to return 10% each year. Though investors are likely to receive 10%, past variations in the investment's return suggest there's a chance they might end up with anywhere from 5% to 15%. While receiving more than 10% would be a pleasant surprise, most investors are likely to worry more about the downside - receiving less than 10%. Hence, they'd probably be willing to settle for a slightly lower return, say 9% or so, if they could be absolutely certain they'd receive that amount. Of course if the variations in the investment's past returns were smaller and suggested an 8% to 12% range, they wouldn't want to give up as much of their expected return.

This concept is the basis for how Morningstar adjusts for risk. A "risk penalty" is subtracted from each investment's total return, based on the variation in its month-to-month return during the rating period, with an emphasis on downward variation. The greater the variation, the larger the penalty. If two investments have the exact same return, the one with more variation in its return is given the larger risk penalty. Investments are ranked within their categories according to their risk-adjusted return (after accounting for all sales charges and expenses) and stars are assigned as follows:


Top 10%

5 stars

Next 22.5%

4 stars

Middle 35%

3 stars

Next 22.5%

2 stars

Next 10%

1 star

For multi-share class investments (open-end , etc), each share class is rated separately and counted as a fraction of a investment within this scale, which may cause slight variations in the distribution percentages. This accounting prevents a single portfolio in a smaller category from dominating any portion of the rating scale.

Investments are rated for up to three periods - the trailing 3, 5, and 10 years - and ratings are recalculated each month. For investments that remain in the same Morningstar Category for the entire evaluation period, its overall rating is calculated using the following weights:


Age of Investment

Overall Rating

At least 3 years, but less than 5

100% 3-year rating

At least 5 years, but less than 10

60% 5-year rating

40% 3-year rating

At least 10 years

50% 10-year rating

30% 5-year rating

20% 3-year rating

If an investment changes Morningstar Categories, its historical performance for the longer time periods is given less weight, based on the magnitude of the change. (For example, a change from a small-cap category to large-cap category is considered more significant than a change from mid-cap to large-cap.) Doing so ensures the fairest comparisons and minimizes any incentive for companies to change an investment's style in an attempt to receive a better rating by shifting to another Morningstar Category.

4Using the Rating

The star rating is best used as an initial screen to identify investments worthy of further research, those that have performed well on a risk-adjusted basis relative to their peers. It's a strictly quantitative measure - a high rating doesn't imply the approval or endorsement of an investment by a Morningstar analyst. Keep in mind that the rating is based solely on the investment's historical performance, a highly rated investment may no longer have the portfolio manager responsible for that performance.

Also, because investments are rated within their respective categories, it's important to note that not all five-star investments are equal or even interchangeable. A five-star sector investment, for example, might have the best risk-adjusted return within its specific category, but it's probably far riskier than a highly rated diversified investment .

Rather than buying investments based on their ratings, investors should first decide on an overall portfolio strategy and then seek the best investments for each portion of their portfolio.

4Rating Changes of 2002

Significant changes were made to the rating methodology, effective 6/30/02. Previously, investments were rated within one of four broad asset-class based groups - U.S. stock, international stock, taxable bond, and municipal bond. The new methodology rates investments within much smaller comparison groups, their respective Morningstar Categories.

The biggest impact of this change is that investments are less likely to receive a high (or low) rating due to a market "tailwind." For example, under the previous methodology, persistent outperformance by the value investment style resulted in high ratings for most value investments , while growth-oriented investments were likely to receive lower ratings. However, the change also means that some extremely risky investments will now receive five stars (those with the best risk-adjusted return within their category), which was difficult under the old methodology.

In addition, a new method is now used for risk adjustment. In the previous methodology, risk was defined by measuring the investment's average underperformance relative to a guaranteed investment, the 90-day Treasury bill. If a investment's return exceeded this benchmark each month, the investment was deemed riskless. Yet investments with highly variable returns are likely to eventually produce losses, even if they're currently enjoying a run of success. Internet funds are a perfect example. Because they outperformed the Treasury bill for many successive months, they exhibited little downward risk in 1999; but they suffered huge losses in subsequent years.

The current methodology accounts for all variations in an investment's monthly performance, with an emphasis on downward variation. It rewards consistent performance and reduces the possibility of strong short-term performance masking the inherent risk of an investment.

4Notes about SA version

Because Separate Accounts are structured differently than funds, here's an overview of the differences:

To learn more about the Morningstar Rating for Separate Accounts, please read the Fact Sheet.

4Notes about Custom Calculation

We do not allow custom calculation for Municipal Bond funds.

See Also