Morningstar, Inc., (MORN) is known as being the financial industry's lead independent research company for mutual funds and exchange-traded funds (ETFs). Morningstar has also ventured into research reports for stocks, bonds, annuities, and even separately-managed accounts. Created in 1984 by Joe Mansueto, the Chicago-based company is now a publicly-traded company and employs 5,230 in 27 countries worldwide, as of 2020. The company provides data on 621,370 investment offerings.
Founder Len Zacks created Zacks Investment Research in 1978. The main focus of Zacks is to provide independent research in order to provide investors with a trading advantage. The company is run by a team of experts who are focused on quantitative analysis of equities, mutual funds, and ETFs.
Zacks Investment Research
Zacks Investment Research has its own mutual fund ranking system that helps its members distinguish which mutual funds have the most potential to outperform the market. In Sept. 2020, there were nearly 19,000 mutual funds that are tracked by Zacks. Zacks Mutual Fund Rank gives every fund a ranking on a one-to-five scale. A rating of one signifies what they consider a "strong buy" recommendation, and a rating of five suggests a "strong sell" recommendation.
- Investors should consider Morningstar and Zacks when they are considering investing in a mutual fund or an exchange-traded fund (ETF), as they offer different analyst ratings and different opinions on the outlook of funds.
- Zacks is much more quantitative in nature, while Morningstar uses fundamental analysis as a larger part of its recommendations.
- Morningstar appears to base its recommendations on an unbiased scale, while the Zacks Investment Research rating system is based solely on giving its members the most potential for profit.
Zacks uses two different mutual fund ranking systems: one for U.S. stock-based funds and one for all other funds. The U.S. stock fund method uses the same ranking system as Zacks’ proprietary individual stock-rating system. It identifies the top holdings within each fund and uses that as its basis for determining the mutual fund ranking system. All other fund rankings are determined by a number of key factors that are proprietary to Zacks and its research team.
Morningstar Inc. is mostly known for its rating system that uses stars, rating funds on a one- to five-star scale. The top 10 percent of funds within each category receive five-star ratings, and the bottom 10 percent receive one-star ratings. Funds are rated on a three-year, a five-year, and a 10-year basis. Together, these three ratings are combined to give each fund an overall rating.
Morningstar uses a proprietary mathematical evaluation based on a fund’s past performance to determine its rankings within a category. Funds with track records of three years or less do not qualify for Morningstar's rating system. Morningstar's rating system does not reflect the opinions of the company. Rather, it is a comparison of a fund’s performance in relation to its peers within its category.
Morningstar also has analyst ratings for mutual funds that are based on a five-tier scale. The ratings are gold, silver, bronze, neutral, and negative. Unlike the star system, which is based on past performance, this rating system provides recommendations on a forward-looking basis. Analysts use five pillars when determining the rating of each fund: process, performance, people, parent, and price. A gold rating would signify that the fund prevails at all five pillars, while a negative rating would suggest the opposite.
Morningstar offers two different membership packages. The basic package is free and only requires users to register through its website. Basic membership includes financial data access, the ability to connect your portfolio to Morningstar research, in addition to access to its article archive and their forums. Investors who wish to see their star ratings or information on a mutual fund or stock are also able to get it through the basic membership option.
Morningstar's premium membership is an option for individuals who want more in-depth research. This includes a wide moat screener for stocks, a gold medalist screener for funds, access to the analyst ratings and reports, a portfolio manager, and a premium e-newsletter. Premium membership has four different pricing options: one year for $199, two years for $349, three years for $449, and monthly for $29.95. As of Sept. 2020, Morningstar offers investors a 14-day trial membership for free.
Zacks, on the other hand, offers a variety of different membership options for investors. The basic membership plan is available for free. With a free membership, users gain access to Zacks e-newsletter, called Profit from the Pros, which is emailed each weekday morning and summarizes the market, what it means for investors and what to do next. The newsletter also includes links to articles featuring 5 newly added Zacks Rank #1 ("Strong Buy") stocks, Bull Stock of the Day, and ETF and mutual fund recommendations. Free membership also includes access to Zacks Portfolio Tracker, where investors can view Zacks Rank and Style Scores for all stocks, Zack's Mutual Fund Rank for mutual funds and ETF Rank for ETFs.
The next level of membership is called Zacks Premium. As of Sept. 2020, the company offers a free 30-day trial, and then a base price of $249 for a one-year subscription. With the premium membership, investors gain access to its list of funds that have a top-ranking (ranked #1). It also gives access to all of the company's research reports, rankings, and screening tools. Finally, users can also track their portfolios against the Zacks ratings and receive a daily email alert with pertinent news.
Zacks' most inclusive package is called the Ultimate subscription. To begin, users only pay $1 for a one-month trial (as of Sept. 2020). After the month expires, the subscription costs $299 per month or $2,995 per year. With this high cost, Zacks Ultimate members receive access to every single recommendation the firm has to offer, along with all the research tools and reports that are included in the premium package. Zacks offers several strategy recommendations, categorized according to time horizon, investing style, trades per month, and the number of stocks within the portfolio. For example, the “Home Run Investor” strategy looks to target under-the-radar stocks that have the potential to grow from 50 percent to 200 percent. If users do not want the costly Ultimate subscription, then each of the strategies is available at an individual price.
Zacks Investment Research vs. Morningstar
Morningstar and Zacks offer similar styles of investment reports for mutual funds. But they present the information in different ways.
Both contain performance numbers and basic fund information, such as fund size and manager information. Both show the top holdings within the fund: Morningstar shows the top 15 funds and Zacks shows the top nine funds.
From a financial data perspective, Morningstar typically provides more information. On the chart, Morningstar shows the performance of the previous 10 years based on an initial $10,000 investment. It also compares that same investment against the fund’s category and standard index. Beneath the chart, Morningstar displays the annual numbers for the net asset value (NAV), total return percentage, the comparison to the standard and category index, the percentage rank within the category, and the number of funds.
The Zacks report chart shows the fund’s performance on a zero-sum scale while comparing it to the benchmark. Zacks also provides annual data on the NAV, total return, annual dividend yield, relative performance to the benchmark, quintile rank, fund assets, annual turnover, dividends paid, and capital gains paid.
While Morningstar provides its “Risk and Return Profile,” showing the three-, five-, and 10-year breakdowns of the Morningstar rating, standard deviation, mean, Sharpe ratio, alpha, beta, and r-square measures, Zacks only shows the three- and five-year measures.
Both reports show the stock sector breakdown, with Morningstar using an S&P sector weighting percentage and comparison to the benchmark. Zacks employs a more colorful pie chart of the stock sector breakdown but does not compare it to the benchmark’s weightings. Both reports show the asset class breakdown and style analysis through its own methods. Morningstar goes a little more in-depth, using its style-box charting method to distinguish the stock and bond makeup within the fund.
Zacks provides a one-paragraph description of each fund, which describes the fund’s brief history and investment objective. The description also provides the dividend payment, and the capital gain frequency and schedule. Morningstar does not provide such information in its reports.
When comparing the rankings, the two providers can sometimes differ but are also often coming to the same conclusion, based on each company’s own process. For example, Morningstar downgraded T. Rowe Price New Horizons Fund's (PRNHX) Morningstar Analyst Rating to Bronze from Gold and placed the fund's Silver rating under review. The decision to downgrade was made after the fund announced a shift in management, with fund manager Henry Ellenbogen leaving at the end of March 2019. Ellenbogen was replaced by Joshua Spencer, who was formerly the manager of the much smaller T. Rowe Price Global Technology Fund (PRGTX). Upon making the change, Morningstar cited the fact that the new manager, Spencer, would be facing a big step-up in terms of fund universe and assets under management. At Zacks, the New Horizons Fund ranking did not change. The Zacks rating for T. Rowe Price New Horizons Fund (PRNHX) remained at one star, signifying a strong buy. In Zacks's February 2019 report on the fund, according to its nine-factor forecasting method, the small-cap growth fund was still a strong buy, even with the change in management, an example of a time in history when the two companies assessments of the same fund have diverged.