As someone who has spent a lot of time in the Fixed Income world of finance I think it's great to see a paper where the researchers spend time and energy looking at the methodology a major player in the space such as morningstar is using. The easiest way to improve your returns in corporate credit is to buy lower rated (riskier) bonds as they are more equity (stock) like since you have a larger component of default risk baked into the security price. Over the long term the lower rated bonds will return more but will do so at higher risk. If you can convince morningstar which puts managers into discreet buckets to put your fund in a bucket that is safer than your actual bonds reflect, you now appear to have more return than your peers (although in reality its just because you have more risk).

The lack of accurate risk (reflected by the average bond ratings of your holdings) is what is really at the core of this argument. The researchers joined together some pretty commonly used datasets in the industry (probably what I would use if I were to do this) and impressively were able to properly take the holdings of managers and come up with a proper risk picture (if you believe that rating agency ratings of bonds reflects the true risk but that for another post). Morningstar basically said that they have a crappy dataset which just doesn't have rating data for many bonds and therefor, when they don't have a value, they just fill in with a default. This makes me think that Morningstar is doing a pretty lazy job in their evaluation of managers (what incentive do they really have, they are a monopoly in this area).

Happy to answer any questions people have.