What Is Morningstar? Investment Research and Ratings Explained

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Morningstar, Inc. is a Chicago-based investment research company that collects data on mutual funds, exchange-traded funds (ETFs), stocks and broader markets, analyzes it, and sells or publishes the results as ratings, reports, software, indexes and portfolio services. Its best-known output is the star rating for funds, which investors, advisors and institutions use to compare investments. The company is publicly traded on Nasdaq under the ticker MORN.

The name can also refer to something unrelated. In technical analysis, a “morning star” is a three-candle chart pattern traders read as a possible bullish reversal. That pattern has nothing to do with Morningstar, Inc.

What Morningstar does

Morningstar’s core business is turning raw investment data into something a decision can be based on. For a fund, that means holdings, fees, returns, risk measures, manager information and a category assignment. For a stock, it means financial statements, analyst estimates of fair value and judgments about competitive strength.

The company serves several audiences at once:

• Individual investors get stock, fund and market analysis, portfolio tools and newsletters. Some of this is free on the website, and full access sits behind Morningstar Investor (formerly Morningstar Premium), a monthly or annual subscription.
• Professionals use products such as Morningstar Direct and advisor platforms for research, reporting, marketing materials and investment planning. Morningstar data is also distributed through financial terminals such as Bloomberg and FactSet.
• Institutions and fund companies license data and indexes. Morningstar Indexes are used for benchmarking and as the basis for investment products.
• Retirement plans use Workplace Solutions, which includes managed accounts for plan participants.

Morningstar also runs investment management services through an advisory subsidiary, including Morningstar Managed Portfolios, and in 2022 formed a Wealth Management Solutions group to bring its advisor tools and portfolio services onto one platform.

How Morningstar makes money

Morningstar earns money mainly from subscriptions, licenses and fees for data and services, not from advertising alone. Its main revenue drivers include:

• Morningstar Data and Analytics: licensed fund, equity and market data and research software.
• PitchBook: a private-markets data and software business covering venture capital, private equity and M&A.
• Morningstar Indexes: index licensing and benchmark services.
• DBRS Morningstar (now Morningstar DBRS): a credit rating agency rating corporate, government and structured debt.
• Workplace Solutions and wealth management: asset-based fees from retirement plans and managed portfolios.

Because fund companies can license ratings and logos for marketing, readers sometimes ask whether this creates a conflict. The star rating is calculated from a published quantitative method, so a fund cannot buy a higher star count. Licensing only lets it advertise the rating it already has.

How the Morningstar Rating for Funds works

The star rating is quantitative and backward-looking. The process runs in four steps:

1. Assign a category. Funds are grouped by what they hold, for example U.S. large-cap growth stocks or intermediate-term bonds. Comparisons happen only within a category.
2. Require a track record. A fund needs at least three years of performance history to receive a rating.
3. Adjust for risk. Morningstar calculates a risk-adjusted return after fees and loads. The adjustment penalizes downside volatility, so a fund with sharp swings scores lower than a steadier fund with similar returns.
4. Rank on a curve. Within the category, the top 10% get five stars, the next 22.5% four stars, the middle 35% three stars, the next 22.5% two stars and the bottom 10% one star.

The overall rating blends three-, five- and ten-year ratings where those periods exist, with more weight on longer histories.

Worked example (hypothetical)

Suppose a category contains 200 rated funds. The curve hands out stars like this:

Fund A returned more than Fund B over three years, but its returns came with deep drawdowns. After the risk adjustment, Fund B ranks 15th and earns five stars, while Fund A ranks 40th and earns four. A third fund in a different category with a lower raw return could still hold five stars, because it is only measured against its own peers.

Interpreting the stars

A five-star rating means a fund did well, after costs and risk, compared with similar funds over the measured periods. It does not forecast future returns. Stars can also change month to month as new performance data enters the calculation, or when a fund moves to a different category.

Other Morningstar ratings

Several other ratings are easy to mix up with the stars:

• Morningstar Medalist Rating: a forward-looking fund rating of Gold, Silver, Bronze, Neutral or Negative. It is based on analyst or model assessments of people, process and fees, not on past returns.
• Stock star rating: for stocks, stars reflect the current price relative to Morningstar’s fair value estimate. A stock trading well below its estimated fair value gets more stars. This is a valuation call, unlike the fund rating.
• Economic moat rating: none, narrow or wide, describing how durable a company’s competitive advantages appear.
• Morningstar Sustainability Rating: shown as one to five globes, it measures how a fund’s holdings score on environmental, social and governance (ESG) risk relative to peers, using data from Sustainalytics, which Morningstar owns.

History

Joe Mansueto, a former stock analyst, founded Morningstar in 1984 in Chicago, believing investors lacked the information to choose funds well. The shift from company pensions toward defined contribution plans such as 401(k)s, which put fund selection in employees’ hands, helped the idea take off.

Morningstar went public in May 2005 at $18.50 per share through an OpenIPO auction, the method Google had used in 2004. In 2017 Mansueto stepped down as CEO in favor of Kunal Kapoor, then president, and remained executive chairman and majority shareholder.

Limitations

• Past performance only. The fund star rating reflects history. A top-decile fund can drift toward average as conditions or managers change.
• Category dependence. A rating says nothing about whether the category itself suits your goals. A five-star fund in a narrow, volatile sector can still be the riskiest holding in a portfolio.
• Survivorship. Funds that close or merge drop out of the rankings, so the surviving peer group can look stronger than the full set that once existed.
• Judgment in other ratings. Fair value estimates, moat ratings and Medalist ratings rest on analyst or model assumptions that can prove wrong.

Most investors treat Morningstar as a starting filter, much like a stock screener, and then look at fees, holdings and fit before deciding.

Morningstar vs. similar sources

Morningstar’s main competitors include Bloomberg, LSEG (which took over Thomson Reuters’ financial data business) and MarketWatch. Bloomberg and LSEG focus on professional terminals, news and real-time data, while MarketWatch is a news-driven financial website.

Morningstar is not the same as Yahoo Finance. Yahoo Finance is a free portal for quotes, news and charts, and it displays some third-party data, including certain Morningstar figures. Morningstar is the research firm that produces its own ratings and analysis.

The Bottom Line

Morningstar ratings matter most to fund investors, advisors and retirement plan participants comparing similar investments. The fund star rating measures past risk-adjusted performance against category peers and does not forecast future returns, and fund companies cannot buy a higher star count. Treat the stars as a starting filter, then check fees, holdings and whether the fund's category fits your goals before deciding.