Morningstar Fund Awards 2007 (Hong Kong)

n year have taken outsized risks to get there, making their performance less than sustainable. Indeed, funds must have at least five years of history to even be eligible for an award, and it takes more than strong returns to merit consideration.

Our awards selection criteria combine both quantitative and qualitative selection criteria and this year the quantitative screens have been further specified. Funds are scored by their total return percentile ranks in their Morningstar categories over one, three and five-year period, with 30% of the total score on the one-year period, 16% on the three-year period, and 24% on the five-year period, for a total of 70% allocated to returns.

The remaining 30% of a fund’s score is allocated to risk adjustment. It is not enough for a fund to have delivered strong returns. After all, the evidence shows that investors make a hash of using volatile funds--they tend to buy near peaks and sell at troughs. And no one likes watching the value of their fund drop by a huge amount.

To adjust for risk, we have used the percentile ranks of a fund's Morningstar Risk score within its Morningstar category. In keeping with our long-term approach, 12% of each fund's total score is based on its three-year Morningstar Risk rank, and 18% is based on its five-year Morningstar Risk rank. We used Morningstar Risk because of its ability to capture investor preferences well. Whereas more typical risk measures such as standard deviation penalise upside and downside variations in returns equally, Morningstar Risk uses the academic concept of utility theory to ensure that funds are penalised more for downside variation. The goal is simple: Investors fear most the risk of loss, so the score should reflect that real-world concern.

Lastly but not the least, we also perform qualitative checks to the shortlisted funds. For example, if our fund analysts collectively believe that a fund’s fundamental risks are just too high for performance to be sustainable, or if we think changes to the management team or structure of the fund could negatively impact future results, we won’t give that fund an award. The awards should be objective, but they should also reflect the knowledge of real risks that our analysts have.

For official methodology, please click here.