Morningstar has debuted its first batch of ratings for semiliquid funds, releasing scores for six interval funds.
In the first batch, two Pimco funds earned silver and bronze medalist ratings. (Morningstar’s scale includes five tiers, gold, silver, bronze, neutral and negative.) Three other funds—two from the Capital Group/KKR joint venture and one from TCW—received neutral ratings, and one, the First Trust Alternative Opportunities fund, earned a negative rating.
Laura Lutton, Morningstar’s global head of manager research, pointed out that few funds the firm evaluates earn gold medalist ratings, so it was not a surprise that none of the first six achieved that distinction.
Morningstar started with these six funds because they are all run by managers that the firm has covered for a long time, so it was already familiar with the management teams and how they construct portfolios. Morningstar plans to release another batch of ratings in the fourth quarter of this year, including from some big players in the semiliquid fund space that Morningstar has not historically covered. After that, ratings will be rolled out on a one-off basis.
“What’s nice about the batch process is that our analysts had an opportunity to line up strategies together and discuss relative strengths and weaknesses,” Lutton said. “That context is helpful as we are venturing into a new vehicle type.”
Morningstar is focusing on registered funds first—interval funds, tender offer funds, non-traded BDCs and non-traded REITs—because they have reporting requirements from the SEC and better data than fully private funds. They are also easier for advisors to use in client portfolios.
“In this space, we asked a lot of questions on how to manage liquidity risk and how private portions work with the public securities portions,” Lutton said. “That varies whether you are Capital Group and KKR is completely separately managing the private asset, versus managers having a more integrated approach. No two firms are doing it the same way.”
Morningstar announced it would rate semiliquid funds earlier this year and followed that by publishing a lengthy report analyzing the space. The report was released in conjunction with its annual Morningstar Investment Conference in Chicago in June. The ratings are meant to help investors evaluate semiliquid funds alongside traditional mutual funds and ETFs. They are derived by assessing a fund’s underlying investment process, management team and parent firm.
In releasing the ratings, Morningstar flagged complex fee structures and limited liquidity features, making the funds difficult to evaluate. Specifically, fees were one of the reasons First Trust’s fund received a negative rating.
“It’s a strat that has performed on an absolute basis, but because it’s a fund of funds, there are a lot of underlying fees,” Lutton said. “Investors need to be mindful of the cost and the hurdle that creates over the long term.”
The ratings are incorporated into Morningstar.com and the firm’s Direct Platform, including Morningstar Direct, Direct Advisory Suite, and in data feeds associated with select interval funds.
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