Morningstar Fund Awards 2008

too often, the winners in a given year have taken outsized risks to get there, making their performance less than sustainable. Indeed, funds must have at least five years of history in the Hong Kong, Malaysia and Singapore markets, and whereas three year for the Taiwan market, 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 (except Malaysia, which has no qualitative selection criteria this year). Funds in the Hong Kong, Malaysia and Singapore markets 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.

In respect of the Taiwan market, funds are scored by their total return percentile ranks in their Morningstar categories over one- and three-year period, with 30% of the total score on the one-year period and 40% on the three-year period, for a total of 70% allocated to returns similarly.

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, the risk score is entirely made up of the three-year Morningstar Risk rank for funds in the Taiwan market. In the Hong Kong, Malaysia and Singapore markets, 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 penalize upside and downside variations in returns equally, Morningstar Risk uses the academic concept of utility theory to ensure that funds are penalized 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 of each market, please select:

Hong Kong

Singapore

Malaysia

Taiwan