What is the methodology behind Morningstarâs tactical allocation rating, and does it incorporate any recent market regime changes?
Methodology
Morningstarâs Tactical Allocation rating is a performanceâbased score. Each month the firm calculates a fundâs riskâadjusted return (primarily a Sharpeâtype ratio) over a rolling 3âyear window and compares that figure to the returns of every other fund in the same tacticalâallocation peer group. Funds that land in the top 10âŻ% of the peerâgroup distribution receive a 5âstar rating; lowerâstar ratings are assigned to the next deciles. The process is purely historical â it looks at how much return a fund generated per unit of volatility and then ranks it against its peers.
Incorporation of marketâregime changes
The rating does not explicitly model recent macro or marketâregime shifts (e.g., a move from a lowâvolatility, inflationâmoderate environment to a highâinflation, rateâhiking cycle). Instead, any regime change is reflected only insofar as it affects the fundâs actual returns and volatility during the measurement period. In other words, a fund that successfully navigated a new regime will earn a higher riskâadjusted return and thus a higher rating, but the methodology itself does not adjust its calculations for regime dynamics or forwardâlooking macro signals.
Trading implications
A 5âstar tacticalâallocation rating, like CRDBXâs, signals that the fund has outperformed peers on a riskâadjusted basis over the past three years. For a trader, this suggests strong tactical positioning and a proven ability to capture upside while managing downside in the current market environment. However, because the rating is backwardâlooking, it may lag behind emerging regime shifts. If you expect a continuation of the conditions that rewarded the fund (e.g., persistent inflationâprotected assets or defensive equity exposure), the rating can be used as a buyâorâhold endorsement. Conversely, if you anticipate a regime reversal (e.g., a pivot to growthâoriented, lowerâbeta assets), the rating alone may not be sufficient to justify a long position; you should complement it with forwardâlooking macro and technical analysis before scaling in or out.