Morningstar unleashes bots to write fund research

Robots are released to write investment reports for Morningstar, the research house that helps investors choose from thousands of mutual and exchange-traded funds for savings and retirement.

At a time when the financial sector is debating the workloads Of its staff during a boom in business and a disruptive pandemic, Morningstar has found a way to increase its written research without further taxing its army of human analysts.

Machine-generated reports that began airing this week lay out the rationale for Morningstar’s so-called analyst rating on a fund, which goes from gold, silver and bronze to neutral. or negative. Ratings, similar to Wall Street buy or sell recommendations, are distinct from Morningstar’s more famous star rating system, which only measures past performance of funds.

Robots were already being used to generate the analyst’s own rating on thousands of small funds. Morningstar said this week that the robot ratings worked as well as the recommendations generated by human analysts, based on three years of data.

The company’s 130 global analysts will remain focused on the most popular funds, said Lee Davidson, manager of manager research and quantitative research at Morningstar. They currently provide written reports on 4,284 funds worldwide, representing $ 20.5 billion in assets under management.

Human or robot: can you spot the difference?

© Morningstar

Here is a selection of quotes from Morningstar research reports generated by humans and computers, but which ones?

1 – “One of the three managers has left, but Pimco Total Return still offers a proven manager and process.”

2 – “Top management revenue at Janus Henderson Balanced reduces conviction in the execution of its process, justifying a downgrade of its Morningstar analyst rating to bronze neutral in all share classes.”

3 – “Templeton Growth has a new lead manager, but there are more attractive options for global equity exposure.”

4 – “The increased confidence in the management team of Strategic Advisers Large Cap is the main driver of the upgrading of the rating of this share class to a Morningstar quantitative rating ranging from silver to bronze.”

5 – “American Funds New Perspective’s stake in polarizing electric carmaker Tesla fell from 3.65% in June to 7.3% in August, 2.5 percentage points higher than its next largest stake .

6 – “T Rowe Price US Equity Research’s remarkable investment process and strong portfolio management team underpin the Morningstar Quantitative Gold Rating of this share class.”

“You need boots on the ground to interview a fund manager and talk to the team about their investment process,” Davidson said. “This type of color is not captured by the quantitative process.”

The computer-generated ratings apply to another 37,962 funds that represent $ 14 billion in assets under management, and it’s those funds that will now start receiving written reports from robots.

“Providing a written report helps explain the rationale for rating a fund, its risks and benefits going forward,” Davidson said.

Morningstar has spent the past 18 months working on the automatic write process and Davidson said “we’ll need to keep improving them,” incorporating suggestions from asset managers and investors. The typewritten analysis will be automatically updated every month.

Human analyst and machine ratings are meant to tell investors whether a fund is likely to outperform or lag an index or benchmark over a market cycle.

Algorithmic ratings, generated by Morningstar since June 2017, aim to mimic the company’s human analysts by taking into account the same factors, such as a fund’s expenses, management turnover rate, historical performance. and portfolio risks.

Human or robot? The answers

Quotes 1, 2, 3, and 5 were written by Morningstar human analysts, while quotes 4 and 6 are computer generated.

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