Morningstar Star Rating

The Morningstar Risk-Adjusted Rating brings both performance and risk together into one evaluation. To determine a fund's star rating for a given period (three, five, or 10 years), the fund's Morningstar Risk score is subtracted from its Morningstar Return score. The resulting number is plotted along a bell curve to determine the fund's rating for each time period: If the fund scores in the top 10% of its broad investment class (domestic stock, international stock, taxable bond, or municipal bond), it receives 5 stars (Highest); if it falls in the next 22.5%, it receives 4 stars (Above Average); a place in the middle 35% earns it 3 stars (Average); those in the next 22.5% receive 2 stars (Below Average); and the bottom 10% get 1 star (Lowest). The star ratings are recalculated monthly.

Morningstar Risk

The Morningstar Risk statistic evaluates the fund's downside volatility relative to that of other funds in its broad investment class (domestic stock, international stock, taxable bond, or municipal bond). Morningstar uses a proprietary risk measure that operates differently from traditional risk measures, such as beta and standard deviation, which see both greater- and less-than-expected returns as added volatility. Morningstar believes that most investors' greatest fear is losing money—defined as underperforming the risk-free rate of return an investor can earn from the 90-day Treasury bill—so our risk measure focuses only on that downside risk. To calculate the risk score, we plot monthly fund returns in relation to T-bill returns. We add up the amounts by which the fund trails the T-bill return each month and divide that total by the period's total number of months. This number, the average monthly underperformance statistic, is then compared with those of other funds in its same broad investment class to assign our risk scores. The resulting risk score expresses how risky the fund is relative to the average fund in its investment class. The average risk score for the category is set equal to 1.00; a Morningstar Risk score of 1.35 for a taxable-bond fund means that the fund has been 35% riskier than the average taxable-bond fund for the period considered. Morningstar does not rate any fund that has less than three years of performance data.

Morningstar Return

The Morningstar Return figure rates a fund's performance relative to other funds in its broad investment class (domestic stock, international stock, taxable bond, or municipal bond). After adjusting for maximum front-end loads, applicable deferred loads, and applicable redemption fees, Morningstar calculates the excess return for each fund, defined as the fund's load-adjusted return minus the return of the 90-day T-bill over the same period. The use of excess instead of raw returns reflects our belief that mutual funds should be rated highly for only those returns earned beyond those of a T-bill, which is essentially a risk-free investment. The excess returns are then compared with the higher of the average excess return of the fund's broad investment class or the 90-day T-bill return. This last adjustment prevents distortions caused by having low or negative average excess returns in the equation's denominator, as might occur during a protracted down market.

The equation is:

(Return on Fund* - T-bill)/Higher of
(Category Return* - T-bill) or T-bill

*Fund returns are adjusted for loads. Investment class average is based on load-adjusted returns.

The resulting Morningstar Return figure is listed relative to the average excess return of the investment category or the T-bill, whichever is higher. A footnote indicates when the T-bill comparison is used. If the Morningstar Return figure is compared with the broad investment class, 1.00 represents the class average. Thus, a figure of 1.10 means that the fund outperformed the class average by 10 percent, while 0.90 means that the fund underperformed by 10 percent. For T-bill comparisons, the same concept is true, but 1.00 occurs when a fund's load-adjusted excess return equals the T-bill. Therefore, a score of 0.90 with a T-bill footnote indicates that the fund's excess return has been 10% lower than the T-bill. In periods of low returns, a fund's raw returns could hypothetically underperform T-bill returns, in which case the figure would be a negative number, such as minus 0.35, meaning that fund's raw returns were 35% less than those of the T-bill.