Morningstar Style Box (2022)

Morningstar Style Box

What is the Morningstar Style Box?

A proprietary Morningstar data point, the Morningstar Style Box is a nine-square grid that provides a graphical representation of the "investment style" of stocks and mutual funds. For stocks and stock funds, it classifies securities according to market capitalization (the vertical axis) and growth and value factors (the horizontal axis). Fixed income funds are classified according to credit quality (the vertical axis) and sensitivity to changes in interest rates (the horizontal axis).

By providing an easy-to-understand visual representation of stock and fund characteristics, the Morningstar Style Box allows for informed comparisons and portfolio construction based on actual holdings, as opposed to assumptions based on a fund's name or how it is marketed. The Style Box also forms the basis for Morningstar's style-based fund categories and market indexes.

How It Works
The vertical axis of the Style Box defines three size categories, or capitalization bands-small, mid-size, and large. The horizontal axis defines three style categories. Two of these categories, "value" and "growth," are common to both stocks and funds. However, for stocks, the central column of the style box represents the core style (those stocks for which neither value or growth characteristics dominate); for funds, it represents the blend style (a mixture of growth and value stocks or mostly core stocks).

(Video) Morningstar Stock Style Box [Video #3]

Style Box assignments begin at the individual stock level. Morningstar determines the investment style of each individual stock in its database. Stocks are evaluated against other stocks in the same geographic area (United States, Latin America, Canada, Europe, Japan, Asia ex-Japan, Australia/New Zealand). The style attributes of individual stocks are then used to determine the style classification of stock mutual funds.

The Horizontal Axis

  • The scores for a stock's value and growth characteristics determine its horizontal placement:
  • Value Score Components and Weights
  • Forward looking measures 50.0%
  • Price/Prospective Earnings.
  • Historical based measures 50.0%
  • Price/book 12.5% Price/sales 12.5% Price/cash flow 12.5% Dividend yield 12.5%
  • Growth Score Components and Weights
  • Forward looking measures 50.0%
  • Long-term projected earnings growth
  • Historical-based measures 50.0%
  • Historical earnings growth 12.5% Sales growth 12.5% Cash flow growth 12.5% Book value growth 12.5%

Growth and value characteristics for each individual stock are compared to those of other stocks within the same capitalization band and are scored from zero to 100 for both value and growth. To determine the overall style score, the value score is subtracted from the growth score.

The resulting number can range from 100 (for low-yield, extremely growth-oriented stocks) to -100 (high-yield, low-growth stocks). A stock is classified as growth if the net score equals or exceeds the "growth threshold" (normally about 25 for large-cap stocks). It is deemed value if its score equals or falls below the "value threshold "(normally about -15 for large-cap stocks). And if the score lies between the two thresholds, the stock is classified as "core."

The thresholds between value, core, and growth stocks vary to some degree over time, as the distribution of stock styles changes in the market. However, on average, the three stock styles each account for approximately one third of the total free float in each size category.

The Vertical Axis
Rather than a fixed number of "large cap"or "small cap" stocks, Morningstar uses a flexible system that isn't adversely affected by overall movements in the market. Large-cap stocks are defined as the group that accounts for the top 70% of the capitalization of each geographic area; mid-cap stocks represent the next 20%; and small-cap stocks represent the balance.

(Video) 023 Using The Mutual Fund Style Box To Select Funds

Moving from Individual Stocks to Funds
A stock fund is an aggregation of individual stocks and its style is determined by the style assignments of the stocks it owns. By plotting all of a fund's stocks on the stock style grid, the range of stock styles included in the fund immediately becomes apparent. An asset-weighted average of the underlying stocks' style and size scores determines a fund's placement in the Style Box.

Style box assignments for stocks are updated each month. Assignments for funds are recalculated whenever Morningstar receives updated portfolio holdings for the fund.

Using the Style Box
In general, a growth-oriented fund will hold the stocks of companies that the portfolio manager believes will increase earnings faster than the rest of the market. A value-oriented fund contains mostly stocks the manager thinks are currently undervalued in price and will eventually see their worth recognized by the market. A blend fund might be a mix of growth stocks and value stocks, or it may contain stocks that exhibit both characteristics.

Understanding how different types of stocks behave is crucial for building a diversified, style-controlled portfolio of stocks or mutual funds. The Morningstar Style Box helps investors construct portfolios based on the characteristics-the style factors-of all the stocks and funds that portfolio includes.

The Fixed-Income Style Box
The model for the fixed income style box is based on the two pillars of fixed-income performance: interest-rate sensitivity and credit quality. As depicted in the image below, the three interest sensitivity groups are limited, moderate and extensive and the three credit quality groups are high, medium and low. These groupings display a portfolio's effective duration and third party credit ratings to provide an overall representation of the fund's risk orientation given the sensitivity to interest rate and credit rating of bonds in the portfolio.

Morningstar Style Box (1)

(Video) What is a Morningstar Style Equity Box

Horizontal Axis: Interest-Rate Sensitivity
The horizontal axis focuses on interest-rate sensitivity as measured by the bond's portfolio effective duration.

Prior to October 2009, US taxable-bond funds with durations of 3.5 years or less were considered short-term (having limited sensitivity to interest rate change); more than 3.5 years but less than 6 years were considered intermediate term (having moderate sensitivity to interest rate change); and more than 6 years were considered longer term (having extensive sensitivity to interest rate change). In October 2009, Morningstar moved from the aforementioned static breakpoints to dynamic breakpoints.

On a monthly basis Morningstar calculates duration breakpoints based around the 3 year effective duration of the Morningstar Core Bond Index (MCBI).

Limited: To be placed in the limited section of the fixed income style box the fund's three year average effective duration needs to fall under 75% of the three year average effective duration of the MCBI (Morningstar Core Bond Index). For example, if the three year average of the MCBI = 5.935, limited funds would have a three year average effective duration < 4.45. These funds have limited sensitivity to interest rate change.

Moderate: To be placed in the moderate section of the fixed income style box the fund's three year average effective duration needs to fall between 75% and 125% of the three year average effective duration of the MCBI (Morningstar Core Bond Index). For example, if the three year average of the MCBI = 5.935, moderate funds would have a three year average effective duration >=4.45 and < 7.42. These funds have moderate sensitivity to interest rate change.

Extensive: To be placed in the extensive section of the fixed income style box the fund's three year average effective duration needs to fall above 125% of the three year average effective duration of the MCBI (Morningstar Core Bond Index). For example, if the three year average of the MCBI = 5.935, extensive funds would have a three year average effective duration >=7.42. These funds have extensive sensitivity to interest rate change.

(Video) Morningstar User Guide--Bond Style Box [Video #4]

By using the MCBI as the duration benchmark, Morningstar is letting the effective duration bands to fluctuate in lock-steps with the market which will minimize market-driven style box changes.

Municipal bond funds with duration of 4.5 years or less qualify as low; more than 4.5 years but less than 7 years, medium; and more than 7 years, high.

Non-US domiciled funds use static duration breakpoints. These thresholds are:

  • Limited: <= 3.5 years
  • Moderate: > 3.5 and <= 6 years
  • Extensive: > 6 years

Vertical Axis: Credit Quality
Historically, Morningstar followed the industry practice of reporting the average credit rating of a bond portfolio by taking a weighted average of ratings based on data provided by the fund company. However, because the default rates increase at an increasing rate between grades (a mathematical property called convexity), this method systematically understated the average default rate of a bond portfolio. For example, for U.S. corporate bonds as of the date of this document, the spread in default rates between CCC and BBB rated bonds was over 21 times that of the default rate spread between BBB and AAA bonds. Yet, the conventional method assumes that these spreads are equal. To see the impact of this, consider a portfolio of 90% AAA bonds and 10% CCC bonds. According to the conventional method, the average credit rating of this portfolio is AA. However, the average default rate for this portfolio is that of BB bonds.

To correct this bias, Morningstar takes the convexity of default rate curves into account when calculating the average credit rating of a portfolio. The first step is to map the grades of a portfolio's constituents into relative default rates using a convex curve. Next, average the resulting default rates (rather than the grades) to come up with an average default rate for the portfolio. Finally, using the same convex curve Morningstar maps the resulting average default rate back into a grade. For example, a portfolio of 90% AAA bonds and 10% CCC bonds will have an average credit rating of BB under this new methodology.

Independent research confirms that the arithmetic average credit rating of a bond portfolio systematically understates the credit risk and that a more meaningful measure would be to average the default probabilities associated with each letter grade and then use the convex curve that relates the numerical representation of the letter grades to default probability to assign a letter or alphanumeric rating to the portfolio. This procedure is detailed in Appendix A.

(Video) Can You Explain the Morningstar Box?

Based on following breakpoints Morningstar maps the calculated average asset weighted letter credit rating (see Appendix A) for all portfolios on the vertical axis of the style box:

  1. "Low" credit quality – where asset weighted average credit rating is less than "BBB-"
  2. "Medium" credit quality – where asset weighted average credit rating is less than "AA-" but greater or equal to “BBB-”
  3. "High" credit quality – where asset weighted average credit rating is "AA-" and higher

Source of Data
The data which drives the fixed income style box is surveyed from fund companies. Morningstar asks fund companies to send the following information on a monthly or quarterly basis for each of their fixed income or allocation funds.

For hybrid funds, both equity and fixed-income style boxes appear.

FAQs

How do you read Morningstar Style Box? ›

The Morningstar Style Box: What Does It Look Like? The value score is subtracted from the growth score. If the result is strongly negative, the stock's style is value; if the result is strongly positive, the stock is classified as growth.

What is Morningstar fixed-income style box? ›

The fixed-income style box is a nine-square box that gives you a visual snapshot of a fund's credit quality and duration. The style box allows investors to quickly gauge the risk exposure of their bond fund.

What is style box in mutual fund? ›

A style box is a graphical representation of a mutual fund's characteristics. The financial services research provider Morningstar, Inc. popularized this tool by placing it alongside its well-known mutual fund ratings system, which ranks mutual funds by assigning them between one and five stars.

What is the use of style box? ›

A style box is a graphical representation of an investment's characteristics. The financial services research provider Morningstar popularized this tool by placing it alongside its popular mutual fund ratings system. Style boxes are primarily distinguished by equity vs. fixed-income investments and mutual funds.

What are Morningstar categories? ›

Morningstar supports global categories, which map into nine global broad category groups (Equity, Allocation, Convertibles, Alternative, Commodities, Fixed Income, Money Market, Property, and Miscellaneous).

Is core and blend the same? ›

Most indexes that seek to track the middle style are typically “Blend,” whereby they hold stocks that are considered both Value and Growth. This approach implies that investing in the “middle,” or Core, is not worthwhile and that an aggregated Blend approach is enough.

What is fixed-income style box? ›

Fixed-income style boxes were created by Morningstar and are most commonly used for mutual funds. They are a valuable tool for investors to use in determining the risk-return structures of their fixed-income investments. They also help investors to classify and choose investments based on certain investing criteria.

How do you read an equity style box? ›

Equity Style Box: Explained - YouTube

What is a style fund? ›

What Is Style? Style refers to the investment approach or objective that a fund manager uses. Style guides how a fund manager selects securities for the fund's portfolio based on their knowledge, skill, and understanding of the market.

What are the 4 types of mutual funds? ›

Most mutual funds fall into one of four main categories – money market funds, bond funds, stock funds, and target date funds. Each type has different features, risks, and rewards.

How many mutual funds should I have? ›

It's best to hold at least three or four mutual funds with different styles and objectives if you're like most investors. They should reduce volatility by combining fund types that don't share the same features. Stock funds may decline a great deal in value in a bear market.

What is the Morningstar Style Box What information does it provide to help investors make their decisions? ›

By providing an easy-to-understand visual representation of fund characteristics, the Morningstar Style BoxTM allowed informed comparisons and portfolio construction based on what funds actually held, rather than assumptions based on a fund's name or how it was described by its marketers.

What is Morningstar Large Cap? ›

Morningstar US Large Cap TR USD

The index measures the performance of US large-cap stocks. These stocks represent the largest 70 percent capitalization of the investable universe. This Index does not incorporate Environmental, Social, or Governance (ESG) criteria. Methodology Documents.

What is value blend and growth? ›

Blend funds are a type of equity mutual fund which holds a mix of value and growth stocks in its portfolio. Blend funds are also known as “hybrid funds.” Blend funds aim for value appreciation by capital gains, and offer an amalgamation of what growth and value funds contain to present to investors.

What sectors are growth stocks? ›

When it comes to stocks, "growth" means that the company has substantial room for capital appreciation. These tend to be newer and smaller-cap companies, and/or those in growth sectors like technology or biotech. Growth stocks may have low or even negative earnings, often making the high P/E stocks.

What is Morningstar used for? ›

Morningstar is a Chicago-based investment research firm that compiles and analyzes fund, stock, and general market data. They also provide an extensive line of internet, software, and print-based products for individual investors, financial advisors, and institutional clients.

How accurate are Morningstar ratings? ›

A study performed by Vanguard found that Morningstar's ratings were not a good method to predict performance when measured against a benchmark. Morningstar itself acknowledges its rating system as a quantitative measure of a fund's past performance that is not intended to accurately predict future performance.

Is a 5 star Morningstar Rating good? ›

The Morningstar Rating is a measure of a fund's risk-adjusted return, relative to similar funds. Funds are rated from 1 to 5 stars, with the best performers receiving 5 stars and the worst performers receiving a single star.

Where should I invest my 401k? ›

The most common investment options include: Stock mutual funds: These funds invest in stocks and may have specific themes, such as value stocks or dividend stocks. One popular option here is an S&P 500 index fund, which includes the largest American companies and forms the backbone of many 401(k) portfolios.

Is large growth the same as large cap? ›

Large-cap stocks are in the top 70% of capitalization of the equity market, the biggest in terms of market share. A growth fund is a mutual fund that includes companies primed for revenue or earnings growth faster than that of their industry peers or the overall market.

Is Blendid a good investment? ›

And they recently recommended our Blendid as a great investment. "Since we recommended Blendid, the company reported 2020 revenue of $64,119 and 2021 revenue of $276,270. In 2020, the company had three operating units. Now it has five.

What is your investment style? ›

What Is Investment Style? Investment style is the method and philosophy followed by an investor or money manager in selecting investments for a portfolio. Investment style is based on several factors and typically tends to be based on parameters such as risk preference, growth vs. value orientation, and/or market cap.

Does Vanguard offer a bond fund? ›

Product summary. This index fund offers a low-cost, diversified approach to bond investing, providing broad exposure to U.S. investment-grade bonds with maturities of more than ten years.

What are value stocks vs growth stocks? ›

Growth stocks are defined as those with 5-year average sales growth above 15%. Value stocks are defined as those with price-to-sales below 1.

What is a style factor? ›

Style factors help explain differences in risks and returns within asset classes. Historically, style factors represent characteristics, such as quality and value, which may determine, for example, why one group of corporate bonds may have outperformed another.

What is five factor model investing? ›

The five-factor model extends the three-factor model by adding two factors: robust-minus-weak profitability (RMW) and low-minus-high (conservative-minus-aggressive) investment (CMA). Like the three-factor model, the five-factor model is an empirical asset-pricing model.

Is factor investing better? ›

When the traditional investment approach is likely to leave you with market-like returns, lower diversification, and higher risk, factor investing comes to the rescue. With factor investing, you are more likely to get a diversified portfolio with lower risk exposure and better returns.

What are the different types of investing styles? ›

TYPES OF INVESTMENT STRATEGY
  • Growth investing. Growth investing focuses on selecting companies which are expected to grow at an above-average rate in the long term, even if the share price appears high. ...
  • Value investing. ...
  • Quality investing. ...
  • Index investing. ...
  • Buy and hold investing.

What is style blending approach to investing? ›

A blend fund (or blended fund) is a type of equity mutual fund that includes a mix of both value and growth stocks. These funds offer investors diversification among these popular investment styles in a single portfolio. Blend funds are a particular case of a hybrid fund.

What is value investment style in mutual fund? ›

A value fund seeks to invest in stocks that are deemed to be undervalued in price based on fundamental characteristics. Value investing is often contrasted with growth investing, which focuses on emerging companies with high growth prospects.

When utilizing the Morningstar Style Box for bonds or fixed-income investments what comprises the two axis? ›

The model for the fixed-income style box is based on the two pillars of fixed-income performance: interest-rate sensitivity and credit quality.

How is the investment style box defined for fixed-income portfolios? ›

A fixed-income style box is made up of nine squares with the vertical and horizontal axis used for defining investment characteristics. Morningstar uses interest-rate sensitivity and credit quality as the two primary characteristics for consideration.

What is an equity style box? ›

An equity style box is a graphic used to demonstrate the main characteristics of a stock or mutual fund, including market cap and investment style. The style box is a nine-square grid with a horizontal and vertical axis and was designed by financial services researcher Morningstar, Inc.

What is your investment style? ›

What Is Investment Style? Investment style is the method and philosophy followed by an investor or money manager in selecting investments for a portfolio. Investment style is based on several factors and typically tends to be based on parameters such as risk preference, growth vs. value orientation, and/or market cap.

What is value blend and growth? ›

Blend funds are a type of equity mutual fund which holds a mix of value and growth stocks in its portfolio. Blend funds are also known as “hybrid funds.” Blend funds aim for value appreciation by capital gains, and offer an amalgamation of what growth and value funds contain to present to investors.

What is Morningstar Large Cap? ›

Morningstar US Large Cap TR USD

The index measures the performance of US large-cap stocks. These stocks represent the largest 70 percent capitalization of the investable universe. This Index does not incorporate Environmental, Social, or Governance (ESG) criteria. Methodology Documents.

What are style portfolios? ›

A fashion stylist portfolio is a way for an aspiring fashion stylist to showcase samples of their work to potential employers. These portfolios usually include skills, accomplishments, sketches and other work.

How do you structure an investment portfolio? ›

How to build an investment portfolio
  1. Decide how much help you want.
  2. Choose an account that works toward your goals.
  3. Choose your investments based on your risk tolerance.
  4. Determine the best asset allocation for you.
  5. Rebalance your investment portfolio as needed.
17 Aug 2022

What strategy helps you create a well balanced portfolio for income investment? ›

The most important aspect of a balanced investment portfolio is diversification. Diversification is the process of investing small amounts of money across a wide range of assets and asset classes.

How do you use an equity style box? ›

Equity Style Box: Explained - YouTube

What is a style fund? ›

What Is Style? Style refers to the investment approach or objective that a fund manager uses. Style guides how a fund manager selects securities for the fund's portfolio based on their knowledge, skill, and understanding of the market.

What is the Morningstar Style Box What information does it provide to help investors make their decisions? ›

By providing an easy-to-understand visual representation of fund characteristics, the Morningstar Style BoxTM allowed informed comparisons and portfolio construction based on what funds actually held, rather than assumptions based on a fund's name or how it was described by its marketers.

Videos

1. Can I Trust Morningstar.com When Picking Mutual Funds?
(The Ramsey Show - Highlights)
2. 20-08-18 KAM's vCotD - Morningstar Style Box
(Stuart Kruse)
3. Morningstar User Guide--Overview [Video #1]
(Rob Berger)
4. Fixed Income Style Box Demo
(Activate Your Money)
5. Style Box: How Equities are Allocated
(Money Talk)
6. Equity Style Box: Explained
(Adam Charles Burke)

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