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Fact Sheet: The New Morningstar Style Box™

Methodology

Investor Benefits Background Understanding the behavior of different stock types
3 Better measures the character- The Morningstar Style BoxTM was introduced in 1992 and is a crucial input to decision making when selecting an
istics of individual stocks—more
in line with the way portfolio
quickly gained favor within the investment community. For individual fund or constructing a diversified, style-
managers look at stocks the first time, individual and professional investors had controlled portfolio.
a way to quickly understand the investment positioning of
3 Creates more accurate, stable
a mutual fund. By providing an easy-to-understand visual Moving Seamlessly from Stocks to Funds
classifications
representation of fund characteristics, the Morningstar to Portfolios to Markets
3 Lays the groundwork for Style BoxTM allowed informed comparisons and portfolio A fund is an aggregation of individual stocks. By plotting
better portfolio assembly, market construction based on what funds actually held, rather all of a fund’s stocks on the stock style grid, the range
monitoring, and fund usage
than assumptions based on a fund’s name or how it was of stock styles included in the fund immediately becomes
3 Remains useful and easy to described by its marketers. In time, the Style BoxTM apparent. An asset-weighted average of the stocks’ net
understand for individual and became the basis for Morningstar’s style-based fund value/growth scores determines the fund’s overall style.
professional investors
categories, a move later followed by other fund trackers.
Investors wishing to manage their exposure to
Building Better Portfolios different stock sizes and investment styles can combine
Morningstar’s original style evaluation methodology was the Style BoxTM plots of several funds to get a precise
designed primarily for categorizing equity mutual funds. picture of the resulting portfolio. Morningstar currently
The new style evaluation methodology introduces a provides several tools to help investors determine
“building block” system that links what are often treated stock size and style preferences (Stock SelectorSM and
as four separate processes—stock research, fund Fund SelectorSM), and monitor their portfolios for
research, portfolio assembly, and market monitoring— changes (Portfolio X-RaySM).
in the belief that a shared analytical framework will lead
to better portfolio construction and fund usage. When and Where
The new Style BoxTM methodology will be implemented
The new methodology begins with a determination of in all Morningstar products this year.
the style of individual stocks. The style attributes of
stocks within a fund are then “rolled up” to determine the In addition, Morningstar recently announced it is
overall investment style of the fund. A portfolio of two launching a family of 16 equity indexes, covering all nine
or more funds can now be constructed based on Style BoxTM assignments and combinations. Each of
knowledge of the characteristics—the style factor the nine style-based sub-indexes contains a weighted
exposures—of all of its component stocks: thus, style- combination of the stocks that belong to that style.
controlled portfolios can now be accessible to all Investors can monitor the returns and risk of different
investors. And finally, the behavior of stocks of different types of stocks on a minute-by-minute basis. This
styles can be monitored on an up-to-the-minute basis is a powerful tool in understanding the behavior of
using Morningstar’s style-based market indexes. individual funds as well as portfolios.

The New Morningstar Style BoxTM: What Does it Look Like?

Fund Investment Style The Morningstar Style BoxTM remains a nine-square of the Style BoxTM will represent the core style
Value Blend Growth
grid—three stock investment styles for each of three size (those for which neither value or growth characteristics
Size
Large categories: small, mid and large. Two of the three dominate); for funds, it will represent the blend
style categories are “value” and “growth,” common to style (a mixture of growth and value stocks or mostly
Mid both stocks and funds. However, the third, central core stocks).
column definition differs. For stocks, the central column
Small

0% 3 Price-to-projected earnings 3 Long-term projected earnings growth Historical based measures 50. the next largest 750 stocks as mid represent the next 20%. £ Value Score 0 to 100 if the result is strongly positive. mid-cap stocks Market Capitalization stocks as large cap.0% Forward looking measures 50.5% 3 Price-to-cash flow 12. on average. But the ultimate advantage of the new a useful and easy-to-understand tool for individual methodology is a logical. Morningstar domestic stock universe. The Morningstar stock universe represents new methodology defines large-cap stocks as those that approximately 99% of the U. and small-cap stocks represent cap. All rights reserved. Fact Sheet: The New Morningstar Style Box™ Methodology The Horizontal Axis: Value Score Components and Weights Growth Score Components and Weights Style Forward looking measures 50. Inc. . The Vertical Axis: Currently Morningstar defines the largest 250 U.5% 3 Price-to-sales 12.5% 3 Dividend yield 12. the stock is classified as “core. Growth Score 0 to 100 If the result is strongly negative. In some cases. What It Means for Investors With the new methodology in place. the stock is classified as growth. each of the three stock styles accounts for approximately one-third of the total free float in a given 100 Value Core Growth 100 size category.S.5% 3 Historical earnings growth 12. their Morningstar CategoryTM (based on a fund’s holdings during the three previous years) will change as well.5% 3 Sales growth 12. ©2002 Morningstar. itself is not changing.5% 3 Cash flow growth 12. the stock’s style is value. core and growth stocks vary to some degree over time. However.S.0% 3 Price-to-book 12. The appearance of the box system and philosophy for stock and fund research. Inc.” The dividing points between value. as the distribution of stock styles changes in the market. Morningstar and the Morningstar logo are either trademarks or service marks of Morningstar. and the remaining stocks as small cap. investors can The new Morningstar Style BoxTM lays the groundwork look forward to more accurate and more stable for better portfolio assembly and monitoring and remains classifications.0% Historical based measures 50. market for actively account for the top 70% of the capitalization of the traded stocks.5% Determining the Style Score The value score is subtracted from the growth score. completely integrated and professional investors. and market monitoring.5% 3 Book value growth 12. The the balance. If the scores for value and growth are not ª Style Score –100 to 100 substantially different. \ change their Style BoxTM classification. A modest number of funds will portfolio construction.