Data and index provider Morningstar plans to enhance the methodology of its Medalist Rating, a five-tier system designed to evaluate an investment strategy’s potential to outperform a relevant index or peer group over the long term.

Ratings, the company explains, are assigned on a scale from gold to negative, based on an evaluation of how much value a managed investment can add compared with its assigned benchmark after fees and the three pillars of people, process and parent that determine the company’s conviction in a particular investment strategy.

The enhancement, which will begin to take effect on October 29, refines the company’s framework for forecasting future returns but maintains the same process for assigning ratings.

Using historical data, the updated framework introduces a more precise assessment of how much value a managed investment can add before fees compared with its assigned benchmark. This is called the alpha potential estimate, and it is an important input into the rating framework.

The updated methodology is expected to change the ratings for about 20% of Medalist-rated investment vehicles, most of which will be downgrades that result from a reduced alpha potential estimate.

The company is also refining the algorithm that evaluates the process pillar of passively managed equity vehicles that are not covered by an analyst. The updated approach will employ a rules-based system that more closely aligns with how the company’s manager research analysts evaluate the process pillar of the ratings for these types of investments.

“There are a wide range of investment products available today, and our ratings serve to guide investors toward informed decisions,” says Jeff Ptak, the company’s chief ratings officer. “Our Medalist Rating has done a good job of sorting funds based on future performance, and this methodology enhancement is an opportunity to build on this strength to further empower investors.”