What Morningstar really wants from fund managers

A recent panel at the Morningstar’s Investment Conference offered insight about the firm’s process and approach to evaluating fund managers. The panel consisted of several Morningstar veterans including Beth Foos who oversees multi asset coverage, Eric Jacobson on fixed income and Andrew Daniels on equities.

What was clear from the discussion is that Morningstar is not looking for perfect performance. It is looking for managers who do what they say, know why they own what they own, can explain what has gone wrong, and are part of an organization where investment decisions take precedence over sales.

Morningstar analysts know a lot before the interview and build an independent view before talking with fund managers. They've already reviewed portfolio data, attribution history, team composition, stated strategy, and website disclosures. They are not collecting information, they are validating it, and investment teams should come prepared to explain their story, not just present it.

How Morningstar evaluates funds

The Morningstar process evaluates funds on what it calls the five Ps:

• People - Portfolio manager passion, team depth, talent retention, and incentive structures aligned to the long term.
• Process - Consistency and repeatability. Does the portfolio reflect what managers say they do, including risk management?
• Parent - Is the firm investment-led or distribution-led? Does leadership support long-term investment decisions?
• Price - Higher fees mean managers must take more risk to outperform. Analysts will scrutinize your edge more closely.
• Performance - Forward-looking, not backward. They care whether past results reflect repeatable skill, not just recent returns.

Ratings are reassessed annually. According to the panel, Morningstar is long-term patient, but a deviation from process or unexpected team departure will trigger a review sooner.

What makes a strong interview

Across all three panelists, the following themes emerged as to what builds trust:

• Explaining underperformance clearly and unapologetically
• Understanding what type of investor the strategy is suited and not suited for
• Proactively describing difficult periods
• Projecting a self-improvement mindset; genuine introspection
• Articulating a clear, differentiated edge
• Staying calm under pressure; a manager who doesn’t get defensive when questioned on weak spots

Red flags analysts actively look for

• Yield that is an outlier vs. peers. Said Eric Jacobson, "There is no more reliable indicator of risk than yield." If your yield is unusually high, expect pointed questions on how you're generating it.
• Attribution that doesn't match your narrative. Claiming outperformance came from security selection when the data shows a sector bet can undermine credibility.
• Portfolio holdings inconsistent with stated philosophy. If you say you own high-quality, low-leverage businesses, they will find the exceptions and ask about them.
• Turnover that contradicts your time horizon. Long-term focused managers who trade frequently — or very infrequently — raise questions about discipline and conviction.
• High fees with no clear edge to justify them. If your firm charges higher than average fees, it will put portfolio managers in a harder position. Analysts want to understand exactly how you plan to clear that bar.
• A sycophantic team or a lone decision-maker. If there aren’t clear checks and balances, it can signal overconfidence and fragility.
• Complete unawareness of the competitive landscape. Managers who think their approach is completely unique when many others are doing similar things. If you don't know what your peers are doing, analysts will wonder who around you is paying attention.
• Reluctance to share information. Omission is more common than outright dishonesty — but both reflect a cultural unwillingness to be transparent.
• A focus on peers' weaknesses, not your own strengths.
• Refusal to discuss losing positions or what went wrong and defensiveness when pressed on portfolio decisions.
• Aggressive pitching rather than honest explanations.

Maintaining the relationship over time

• Communicate proactively during rough patches. Managers who reach out during underperformance — and can explain it coherently — earn patience. Silence does not.
• Be transparent through M&A. When acquisitions happen, analysts are watching retention, culture integration, and strategy continuity closely. Optimistic framing without follow-through erodes credibility.
• Don't chase performance trends. Managers who deviated to chase momentum (e.g., abandoning a quality approach in a hot market) faced downgrades. Those who stayed disciplined are given more runway.
• Be prepared for follow-up questions after meetings. Analysts often leave with additional questions. A responsive, forthright follow-up strengthens trust.

The takeaway

If you remember nothing else, it is worth internalizing a few themes from the panel:

Transparency is highly valued. Across all three analysts, the thread was straightforward: be forthright about what you own, why, and what's gone wrong. Sins of omission — not outright dishonesty — are what most commonly damage the relationship.

Process is an important pillar — and the squishiest. The interview matters most here. Analysts want to understand the decision-making structure: who has authority, what the checks and balances are, and whether the process is genuinely repeatable. Be specific. Abstract descriptions of "rigorous research" raise more questions than they answer.

Explain your losses as well as your winners. This came up multiple times. How a manager responds when pushed on underperforming positions — or difficult periods — reveals more about temperament and conviction than any amount of pitch material. Defensiveness is a red flag; introspection is reassuring.

Reach out during tough stretches, not just strong ones. Managers who proactively contacted analysts during underperformance — and could explain coherently whether they were staying the course and why — were given significantly more patience than those who went quiet.