Glossary term
Morningstar Risk-Adjusted Return (MRAR)
Morningstar Risk-Adjusted Return is Morningstar's measure of return after applying a penalty for volatility, especially downside variation.
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What Is Morningstar Risk-Adjusted Return?
Morningstar Risk-Adjusted Return, or MRAR, is Morningstar's measure of return after applying a penalty for volatility, especially downside variation. It is used in Morningstar's fund rating methodology to compare funds after accounting for the risk investors experienced along the way.
The idea is straightforward even though the calculation is technical: investors generally prefer smoother returns and dislike large downside swings. MRAR reduces the return score for funds whose month-to-month results are more volatile, with particular attention to poor outcomes.
Key Takeaways
- MRAR adjusts a fund's return for risk using Morningstar's methodology.
- The risk penalty is larger when returns vary more, especially on the downside.
- MRAR helps support Morningstar's star rating for funds.
- It is based on historical returns, not a forecast of future performance.
- Investors should use MRAR alongside costs, holdings, strategy, taxes, and portfolio fit.
How MRAR Works
Morningstar starts with monthly total returns, adjusts them within its methodology, and applies a risk penalty. A fund with higher return volatility receives a larger penalty. If two funds have similar returns, the one with the smoother risk profile may have the better risk-adjusted result.
MRAR is built around expected utility theory, which reflects the idea that investors are generally more hurt by bad outcomes than they are helped by equally large upside surprises. That makes it different from simply ranking funds by raw return.
MRAR Compared With Similar Measures
Measure | What It Emphasizes |
|---|---|
Total return | How much the fund gained or lost before risk adjustment. |
MRAR | Return after Morningstar's risk penalty. |
Morningstar Risk | The difference between Morningstar return and MRAR under the methodology. |
Sharpe ratio | Excess return per unit of volatility using a different framework. |
How Investors Should Use It
MRAR can help investors compare funds in the same category, especially when one fund's return came with much more volatility than another's. It is a useful reminder that the path of returns matters, not just the ending number.
Still, MRAR is historical. It does not know whether a manager will outperform, whether a strategy will remain in favor, or whether a fund is right for a taxable account. It should be treated as one input in fund evaluation.
The Bottom Line
Morningstar Risk-Adjusted Return measures fund performance after applying a risk penalty. It is useful for comparing historical fund experience, but it does not replace forward-looking analysis or portfolio-fit judgment.