Morningstar's proprietary measure of performance; one of the two components that go into calculating a fund's risk-adjusted rating. Morningstar separates funds into four broad investment classes: domestic stock, international stock, taxable-bond, and municipal bond. Morningstar does not calculate a return score for any fund that has less than three years of performance data.
The Morningstar Return figures rate a fund's performance relative to its category based on total returns in excess of the three-month Treasury bill return. The Morningstar Return figure for a fund is listed relative to the average of its broad investment class, which is set at 1.00. A figure of 1.10 means that the fund's excess return over the Treasury-bill return was 10% better than the average excess return for its class in the given time period. A score of 0.90 indicates that the fund's excess return was 10% below the class average. To prevent near- or below-zero class averages, the T-bill return is used as a surrogate category in cases where the average excess return is less than the actual T-bill return.
Benefits
Unlike ordinary total return figures, the Morningstar Return figure puts a fund’s returns in context of a risk-free rate. With the average excess-return set at 1.00, it’s readily recognizable if a fund has underperformed or beaten its peers. The use of excess returns reflects our belief that mutual funds should be rated highly for only those returns earned beyond those of a T-bill, which is essentially a risk-free investment.
Origin
Morningstar Return is calculated in-house, using the Morningstar database.
Example
As of January 1998, Adams Express had a 3-year Return score of 1.18. This indicates that the fund performed 18% better than the average equity fund for the 3-year time period.
For the Pros
The Return figure rates a fund's performance relative to its investment class based on total returns in excess of the three-month Treasury-bill return.
The Formula
The Morningstar Return Score is calculated as follows:
Return on Fund - T-bill
>MAX (Class Return - T-bill, T-bill)
where:
MAX (Class Return - T-bill, T-bill) = the larger of the excess return for the asset class or the T-bill return.
and
Excess return = (Average Return for Class - T-bill)
When the T-bill return is greater than the return of the asset class minus the T-bill, then Morningstar uses the T-bill figure alone. In such instances the basis is 0.00, rather than 1.00.