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Equitable's downgrade confirmed

Part of the reason Equitable has lost one of its stars is due to a change in the rating process, executive director David Forgie says.

Wednesday, March 14th 2001, 10:09PM

by Philip Macalister

Research house Morningstar has confirmed that it has downgraded Equitable Life Insurance from being a four star manager to a three star one.

The researcher upset Equitable's management late last year when it suspended the company's rating, citing poor information disclosure from the manager.

The situation was further compounded by Morningstar's decision to temporarily suspended Equitable's rating "pending possible downgrade".

Equitable executive director David Forgie disputed Morningstar's version of events and claimed the researcher was prejudging the outcome of any future ratings process.

Morningstar says in its latest report that the downgrade was driven by changes in the ratings of many of Equitable’s funds.

It says 47 percent of Equitable’s funds had four star ratings at September 30, but that number has now fallen to 22 percent. Conversely, the proportion of Equitable’s funds with two star ratings more than tripled, from 12 percent to 39 percent at January 31.

"The proportion of Equitable’s funds with two star Morningstar Star Ratings at January 31 is substantially above the average 25 percent. (Interestingly, none of Equitable’s funds had five star Morningstar Star Ratings at either 30 September 2000 or 31 January 2001)," Morningstar says in its report.

Forgie says he is comfortable with the three star rating. However, he has some concerns with the way it happened.

One of his issues is that Morningstar has fundamentally changed its process from one where a manager answers questions with either a yes or no, to one where a range of answers are provided.

Morningstar says the changes are a refinement to its process.

It says the refinement, and in particular, to the trend rating has "been altered from a binary ‘pass/fail’ benchmark to a more sophisticated, five-point graduated scale from ‘very negative’ to ‘very positive’.

"Therefore, some of the movements in Equitable’s Morningstar Ql ratings can be attributed to this process refinement."

Forgie says under this new system the majority of managers face downgrades.

He is also concerned that the change in process hasn't been well communicated to users of the rating system.

"(They) need to make the marketplace more aware of how they rate organisations," he says.

Forgie says although Equitable has worked through its issues with Morningstar, he hasn't changed his views on the value of ratings.

"They're not essential or vital to the business," he says.

Previous stories

Equitable Slams Morningstar Report


The stars fall for four managers
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