Morningstar, Inc. (NASDAQ: MORN) is known as being the financial industry's lead independent research company for mutual funds and exchange-traded funds (ETFs). The company 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 publicly traded and, as of 2016, had 3,930 employees worldwide. The company provides data on more than 510,000 investment offerings.
Founder Len Zacks created Zacks Investment Research in 1978. The main focus of Zacks is to provide independent research that will give investors a trading advantage. The company is run by a team of experts who are focused on quantitative analyses of equities, mutual funds, and ETFs.
Morningstar is mostly known for its star rating system, rating funds on a one- to five-star basis. The top 10% of funds within the category receive five-star ratings, and the bottom 10% receive one-star ratings. Each fund is put in a particular category and rated on a three-year, a five-year and a 10-year basis. Together, these three ratings are combined to give the 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 rankings. Morningstar makes it clear that the rating system is not an indication of an opinion. It is more of a comparison of a fund’s performance in relation to its peers within its category.
Morningstar also has analyst ratings for mutual funds, 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 is the company’s recommendation on a forward-looking basis. Analysts use a five-pillar basis when determining the rating; 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.
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 March 2016, there are more than 19,000 mutual funds covered by Zacks, which are rated on a one-to-five scale. A rating of one signifies a "strong buy" recommendation, and a rating of five suggests a "strong sell" recommendation. There are two different mutual fund ranking systems in Zacks' method, 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 funds rankings are determined by a number of key factors that are proprietary to Zacks and its research team.
Morningstar offers two different membership packages. The basic package is free and only requires users to register through the website. Basic membership includes financial data access, the ability to connect your portfolio to the Morningstar research, and access to the article archive and the forums. Investors who wish to see the star ratings or information on a mutual fund or stock are able to get it through the basic membership option. Those looking for more in-depth research should opt for the premium membership. This includes a wide moat screener for stocks, a gold medalist screener for funds, access to the analyst ratings and reports, a better portfolio manager and a premium e-newsletter. As of March 2016, Morningstar offers a free 14-day trial period with the premium membership. After that, there are four different options: one year for $199, two years for $339, three years for $439 and monthly for $23.95.
Zacks, on the other hand, offers many different membership options to investors. The basic membership plan is called Zacks Premium. The company offers a 30-day free trial for the membership, and then the base price is $249 for a one-year subscription. During this free trial, Zacks also gives access to a special report, titled “7 Best Stocks for the Next 30 Days.” With the premium membership, users gain access to ratings for 4,400 stocks and 19,000 mutual funds. Within the equity area, the membership also gives access to the Zacks Rank #1 List and Focus List. It also gives access to all of the Zacks 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 the Ultimate subscription. To begin, users only pay $1 for a one-month trial. After the month expires, the subscription costs $299 per month. 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 currently offers 19 different 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 50 to 200%. If users do not want the costly Ultimate subscription, then each of the 19 strategies is available at an individual price.
Mutual Fund Report Comparison
Morningstar and Zacks offer similar styles of investment reports for mutual funds. Both contain performance numbers and basic fund information, such as fund size and manager information. Both show the top holdings within the fund, with Morningstar showing the top 15 and Zacks showing the top 9.
From a financial data perspective, Morningstar typically provides more information. On the chart, Morningstar shows the performance of the previous 10 years, based on starting with a $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. The annual data provided is the NAV, total return, annual dividend yield, relative performance to the benchmark, quintile rank, fund assets, annual turnover, dividends paid and capital gains paid.
Keeping with the theme of providing more information, Morningstar provides its “Risk and Return Profile,” which shows 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 opts for a more colorful pie chart of the 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.
From a fund description, Zacks provides a one-paragraph description of the 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 differ as well, based on each company’s own process. For comparison, look at the American Funds Captial Income Builder A ("CAIBX"). Morningstar currently has a four-star rating and an analyst rating of Silver. This indicates that the fund has performed fairly well compared to its peer group and is a moderate buy recommendation. Morningstar categorizes the fund as a US OE World Allocation and uses the Morningstar Global Allocation as the category index and the Morningstar Moderate Target Risk as the standard index.
Zacks' rating for CAIBX is very different from the Morningstar rating. Zacks currently gives a four ranking, signifying a sell recommendation.
Investors should consider both research providers when analyzing a mutual fund. Morningstar and Zacks offer different analyst ratings and, therefore, 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.