Fund Scorecards FAQ Morningstar's Due Diligence Reports

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? FAQ Morningstar's Due Diligence Reports Due Diligence Reports 1 January 2017 Contents 1 Description 2 Frequently Asked Questions Michael Laske Manager Research & Due Diligence Reports Product

1 ? FAQ Morningstar's Due Diligence Reports Due Diligence Reports 1 January 2017 Contents 1 Description 2 Frequently Asked Questions Michael Laske Manager Research & Due Diligence Reports Product Manager michael.laske@morningstar.com Introduction For institutions, advisors, and investors, the Due Diligence Scorecards for funds provide the best forward-looking insights and transparency into the mutual fund and ETF universe, because they combine two proven approaches for evaluating funds into one easy-to-read report. Data-Driven Analysis for Comparing Funds With the ability to choose from more than 8,000 funds, investors face a paradox of choice. The Fund Scorecards solve this challenge by bringing together Morningstar's strengths research and data into a unique solution and help people calibrate their own views. They provide an efficient method for investors who want to use data-driven analysis as an input into their manager selection process. Analyst Rating Scorecard Ranking Source Manager Research Group Due Diligence Scorecards Approach Qualitative Quantitative Results Five Tiers Numerical Measure Absolute Relative Judgment Subjective Objective Framework Bottom-Up Top-Down Fund Coverage 18% 92%

Page 2 of 5 Frequently Asked Questions How are the scores determined? The provide numerical scores for open-end mutual funds and ETFs, relative to other funds in their peer group.

2 Page 2 of 5 Frequently Asked Questions How are the scores determined? The provide numerical scores for open-end mutual funds and ETFs, relative to other funds in their peer group. The scores are determined by a 12-factor formula, which varies by asset class, and accounts for fees, manager experience, and past performance, among other factors. In short, the scorecards take a lot of data and condense it into a ranking that can be interpreted and easily understood. Therefore, it suggests that when a fund earns a favorable score, it has many characteristics that will serve investors' best interests and is associated with below-average fees, an experienced portfolio manager, and a proven track record. Over time, a fund that improves on these factors will see its score improve as well. How do the complement Morningstar's Analyst Ratings? From a qualitative perspective, Morningstar's manager research group takes a holistic look at the fund and focuses on five pillars, which our analysts believe identify the strategies most likely to outperform their peers over the long run on a risk-adjusted basis. Final decisions are based on interviews with the portfolio manager. From a quantitative perspective, the scorecards are targeted for institutions, advisors, and investors that want to use data-driven analysis as an input into their manager selection process. The scorecards were built to succeed on three dimensions: (1) Efficacy, (2) Transparency, and (3) Broad Coverage. The scorecards aim to capture as much forecasting power as possible without losing interpretation and understanding. They are in no way substitutes for analyst judgment, but often provide valuable insights and serve as a very useful focal point in manager selection discussions. Each System Provides Strengths to Help You Calibrate Your Own Views

3 Page 3 of 5 How do the complement Morningstar's Quantitative Ratings? This rating attempts to predict how our manager research analysts would evaluate a fund if they covered it. As a result, they are assigned to most funds that are not covered by an analyst. The ratings rely on a complex Random Forest nonlinear calculation. At the opposite end of the spectrum, the Fund Scorecards rely on a 12-factor formula that is less complex and more transparent, which can be helpful for investors who are trying to understand a fund's strengths and weaknesses. Are the a substitute for Morningstar's Star Ratings? Yes, Morningstar's Star Ratings are backward-looking and based on past risk-adjusted performance. Investors should only use the Star Rating to learn how a fund has performed in the past. If an investor's goal is to choose the best funds for the future, the are a better starting point. How do the help investors? Screening funds effectively is a major focus of investors. In the 10th anniversary of the Morningstar magazine, our leaders focused on their latest initiatives for helping investors make better decisions. Our belief is that investors don t need more raw data, they need more predictive data in a form they can understand and use. The convert complex, raw data into an easy-to-understand score. How do the help advisors? To meet a Best Interest Standard, financial advisors must "investigate and evaluate investments, make recommendations, and exercise sound judgment in the same way that a knowledgeable and impartial professional would." Since the were built by in an independent research firm without any conflicts of interest, and they use a proven framework for forecasting fund performance, they help advisors fulfill their fiduciary responsibility during the manager selection process. How do the help institutions? Many home office teams use the today as an input into their process for creating Recommended Lists, and for monitoring funds on their brokerage or advisory platforms. To manage regulatory risk, they also rely on the scorecards to identify and cut low-quality funds. What types of investments are scored? The are available for open-end mutual funds and exchange-traded funds. We are exploring the development of additional scorecards for different investment types, such as separate accounts and CITs.

4 Page 4 of 5 Can the forecast risk-adjusted performance? Our testing shows the have historically had a high correlation with risk-adjusted performance and increase the likelihood of picking the best funds. During a 14-year period, there was a 78% probability that a top-scoring fund would have performed better than its peer group average. Further, there was only a 6% probability that a top-scoring fund would perform in the bottom quartile. The Top-Scoring Funds Correlate With Better Future Risk-Adjusted Performance Source: Morningstar Research Services LLC. Data as of dates: 1/1/ /31/2015. How do the distinguish between funds across asset classes? The have six styles. The scoring criteria are adjusted for each style to capture the differences between funds with distinct objectives, for example, actively-managed equity funds and passively-managed bond funds. What other Due Diligence Scorecards do you offer? In addition funds, we also provide a Due Diligence Scorecard for fund families. Are the different from Morningstar s Best Interest Scorecard? Yes, the Best Interest Scorecard is targeted for advisors as a tool for portfolio evaluation. This tool provides a report card to compare an investor s current portfolio with a hypothetical portfolio. How can I access the? The, as part of Morningstar's Due Diligence Reports offering, can be licensed from Morningstar. The offering includes a suite of reports that are delivered monthly, and a service to support firm-specific customization. K

5 Page 5 of 5 About Morningstar Manager Research Morningstar provides independent, fundamental analysis on managed investment strategies. Analyst views are expressed in the form of Analyst Ratings, which are derived through research of five key pillars Process, Performance, Parent, People, and Price. A global research group issues detailed analyst reports on strategies that span vehicle, asset class, and geography. About Due Diligence Reports Morningstar's Due Diligence Reports are provided to institutions, advisors, and investors and serve as a toolkit to determine, demonstrate, and document a proven process for manager selection. Due Diligence Scorecards use data-driven analysis to compare mutual funds and ETFs against their respective peer groups. Due Diligence Watchlists monitor funds with red flags, and Alerts perform ongoing oversight. Considered a complement to Morningstar's software products, the Due Diligence Reports strengthen Morningstar's moat by incorporating proprietary data, research, a peer group classification system, and a proven scoring framework into one solution a combination unmatched in the manager research industry. For More Information Jordana Jantze Senior Relationship Manager, Manager Research & Due Diligence Reports jordana.jantze@morningstar.com Michael Laske Product Manager, Manager Research & Due Diligence Reports michael.laske@morningstar.com? 22 West Washington Street Chicago, IL USA

Fund Scorecards Methodology Morningstar's Due Diligence Reports

Fund Scorecards Methodology Morningstar's Due Diligence Reports ? Methodology Morningstar's Due Diligence Reports Morningstar Due Diligence Reports 1 January 2017 Version 1.2; 1 October 2017 Introduction At Morningstar s core is research and data, but transparency