Investment Company RatingsWritten by Shirley Parker
Investment company ratings are a good barometer of how the industry views the management of each investment company it rates, and how well that company is handling other people's money. In many cases, the funds managed by an investment company are owned by institutions or other large entities, rather than by individuals. But a mismanaged pension fund, as just one example, can ruin the lives of many thousands of retired and soon-to-be-retired employees.
With regard to an investment company, the ratings agencies do give individual investors an idea about the risk involved in putting their money into various funds. Probably the best-known name in the rating of mutual funds and variable annuities is Morningstar. Its in-depth measurements of performance and risk, against the 90-day Treasury Bill benchmark, result in a rating star system.
Morningstar's five-star ranking goes only to the top 10 percent of three different investment classes. The following 22.5 percentile funds will receive four stars. Three stars go to the middle 35 percent. Two stars go to the 22.5 percent below that. Then the remaining star goes to the bottom 10 percent.
Some rather well known rating names include Standard & Poor's, Moody's, and Fitch (and A. M. Best for the insurance industry). These names carry substantial weight in the overseas markets as well. Some of their ratings apply to the credit-worthiness of a corporation. When an actual country or its government is rated, the criteria involve political risk, stability, social unrest, and so forth. At times, the economy may be rated also. If Standard & Poor's, for example, changes a country's rating, that can have nightmare effects on the lifestyle of its people.