Equity Investment Style
The Morningstar Ownership ZoneSM provides a graphic and intuitive representation of the size and investment style of stocks in an equity portfolio. The Ownership Zone is derived by plotting each stock in the portfolio within the Morningstar Style Box. The Ownership Zone is the shaded area that represents 75% of the assets in the portfolio and indicates the level of concentration in the holdings. The “centroid” in the middle of the Ownership Zone represents the weighted average of all the holdings. The Ownership Zone helps investors differentiate between portfolios that may otherwise look similar. Investors can also use the Ownership Zone to construct diversified portfolios and model how multiple funds complement one other in a portfolio.
Morningstar Style Box Overview
The Equity Style Box is a nine-box matrix that displays the weighted portfolio stock and mutual fund investment methodology and the size of the companies in which they invest. Combining these two variables offers a broad view of a portfolio's equity holdings and risk. For a complete explanation of how we calculate the Equity Style Box for stocks and stock funds, see the Morningstar Style Box topic.
The following are the five value factors used to calculate the Morningstar Style Box.
Price/Projected Earnings: For portfolios, this data point is calculated by taking an asset-weighted average of the earnings yields (E/P) of all the stocks in the portfolio and then taking the reciprocal of the result.
Price/Book (Projected): For portfolios, this data point is calculated by taking an asset-weighted average of the book value yields (B/P) of all the stocks in the portfolio and then taking the reciprocal of the result.
Price/Sales (Projected): For portfolios, this data point is calculated by taking an asset-weighted average of the sales yields (S/P) of all the stocks in the portfolio and then taking the reciprocal of the result.
Price/Cash Flow (Projected): For portfolios, this data point is calculated by taking an asset-weighted average of the cash flow yields (C/P) of all the stocks in the portfolio and then taking the reciprocal of the result.
Dividend Yield (Projected): For portfolios, this data point is calculated by taking an asset-weighted average of the dividend yields of all the stocks in the portfolio.
The following are the five growth factors used to calculate the Morningstar Style Box. For portfolios, these figures are share-weighted averages of all the stocks in the current portfolio, because the share-weighted average is more accurate than an asset-weighted average for these types of calculations.
Long Term Projected Earnings Growth: The long-term projected earnings growth rate for a stock is the average of the available third-party analysts’ estimates for three- to five-year EPS growth.
Historical Earnings Growth: The historical earnings growth rate for a stock is a measure of how the stock’s earnings per share (EPS) has grown over the last five years. Morningstar uses EPS from continuing operations to calculate this growth rate.
Book Value Growth: The book value growth rate for a stock is a measure of how the stock’s book value per share (BVPS) has grown over the last five years. Book value growth is one of the five growth factors used to calculate the Morningstar Style Box.
Sales Growth: The sales growth rate for a stock is a measure of how the stock’s sales per share (SPS) has grown over the last five years. Sales growth is one of the five growth factors used to calculate the Morningstar Style Box.
Cash Flow Growth: The cash flow growth rate for a stock is a measure of how the stock’s cash flow per share (CFPS) has grown over the last three to five years.
Geometric Average Capitalization ($Mil)
Morningstar defines the overall "size" of a stock fund's portfolio as the geometric mean of the market capitalization for all of the stocks it owns. It's calculated by raising the market capitalization of each stock to a power equal to that stock's stake in the portfolio. The resulting numbers are multiplied together to produce the geometric mean of the market caps of the stocks in the portfolio, which is reported as geometric average cap.
This number is different from the fund's median market cap—the capitalization of the median stock in its portfolio. The geometric average cap better identifies the portfolio's "center of gravity." That is, it provides more accurate insight into how market trends (as defined by capitalization) might affect the portfolio.
Investment Style History (Morningstar Style Box)
The Morningstar Style Box is a nine-square grid that provides a graphical representation of the investment style of stocks and 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).
Fixed-Income Investment Style
Listed for both domestic and international fixed-income funds, with the exception of convertible-bond funds. The data focus on the two pillars of fixed-income performance: interest-rate sensitivity and credit quality. Morningstar splits fixed-income funds into three duration groups: limited (Ltd), moderate (Mod), and extensive (Ext), and three credit quality groups: high- (H), medium- (M), and low-quality (L).
These groupings display a portfolio’s effective duration and credit quality to provide an overall representation of the fund’s risk, given the length and quality of bonds in its portfolio. As with equity funds, nine possible combinations exist, ranging from short duration/high quality for the safest funds to long duration/low quality for the riskiest.
Average Effective Duration: A measure of a fund's interest-rate sensitivity—the longer a fund's duration, the more sensitive the fund is to shifts in interest rates. Duration is determined by a formula that includes coupon rates and bond maturities. The relationship between funds with different durations is straightforward: A fund with a duration of 10 years is twice as volatile as a fund with a five-year duration. Morningstar prints an average effective duration statistic that incorporates call, put, and prepayment possibilities.
Average Effective Maturity: Average effective maturity takes into consideration all mortgage prepayments, puts, calls, and adjustable coupons, and other features of individual bonds. The number listed is a weighted average of all the maturities of the bonds in the portfolio, computed by weighing each maturity date (the date the security comes due) by the market value of the security.
Average Credit Quality: An average of each bond’s credit rating, adjusted for its relative weighting in the portfolio.
Average Weighted Coupon: This figure is calculated by weighting each bond's coupon by its relative size in the portfolio. This figure indicates whether the underlying fund owns more high- or low-coupon bonds. T
The credit analysis depicts the quality of bonds in the fund's portfolio. The analysis reveals the percentage of fixed-income securities that fall within each credit-quality rating as assigned by Standard & Poor's or Moody's.
At the top of the ratings are AAA bonds. U.S. government bonds are also included within the AAA category (effective 6/30/06). Bonds with a B rating are the lowest bonds that are still considered to be of investment grade. Bonds that are rated lower than B (often called junk bonds or high-yield bonds) are considered to be quite speculative. Any bonds that appear in the NR/NA category are either not rated by Standard & Poor's or Moody's, or do not currently have a rating available.
This section shows the weighting of the portfolio in Cash, U.S. Stock, Non-U.S. Stock, Bonds and Other. Other includes securities that are not neatly classified in the other asset classes, such as convertible bonds and preferred stocks.
How do I interpret the bar graph?
Sector Weightings (stock funds only)
Depending on your institution, you may see either the Morningstar Sectors or S&P Sector Weightings in Morningstar Advisor Workstation.
S&P Sector Weightings:
International Exposure ( international stock funds only)
This data set provides a broad breakdown of a fund's geographical exposure. Each region's exposure is presented as a percentage of non-cash equity assets held by the fund. Regional exposure information summarizes a portfolio's exposure to geopolitical risk. It also provides a reference point for understanding fund returns. Some fund managers follow a "top down" discipline, where they direct their investments into regions they consider good opportunities.
For stock funds, regional exposure is calculated as a percentage of stocks; for bond funds, the data is available for international bond funds only, and is culled from quarterly surveys.
Morningstar’s regions are classified into the geographic regions. The regions are then folded into three super geographic regions of the Americas, Greater Europe and Greater Asia. They are based on the following three criteria:
Common economic/currency denominator
Sufficient population of publicly traded equities.
Logistics and geography.
Morningstar Super Regions
The Americas: This super region includes North America (the U.S. and Canada) and Emerging Central & Latin America. Within this super region, we have the following economic regions:
North America: the U.S. and Canada
Latin America: Mexico and all of Central and South America
Greater Europe: This super region includes the United Kingdom, continental Europe (Western and Eastern Europe, Russia) and Africa. Within this super region, countries are classified as Euro and Non-Euro, as well as “Developed” and “Emerging”. Within this super region, we have the following economic regions:
Europe - Developed: Europe ex U.K.; Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain
Europe - Emerging: Russia and other Eastern European countries
Africa/Middle East: Africa and the Middle East
Greater Asia: This super region includes Asian countries. In addition to stand alone countries, or sub-regions such as Japan and Australasia (Australia and New Zealand). Within this super region, we have the following economic regions:
Australasia: Australia and New Zealand
Asia - Developed: Hong Kong, Singapore, South Korea, Taiwan
Asia Emerging: Asia ex 4 Tigers; Near East, Far East
Not Classified: Not all individual stocks or all securities in fund portfolios can be identified or classified by Morningstar. If a security cannot be identified or classified, it will be reflected in this number.
Displays the countries in which the fund invests most heavily. This information is gathered from fund companies and is the most recent data available.
Top 25 Holdings
Total Number of Stock Holdings: Denotes the total number of equity securities in a fund’s portfolio. This number can be quite useful for gaining greater insight into the portfolio’s diversification.
Total Number of Bond Holdings: Denotes the total number of fixed-income securities in a fund’s portfolio. This number can be quite useful for gaining greater insight into the portfolio’s diversification.
% Assets in Top 10 Holdings : The aggregate assets, expressed as a percentage, of the fund's top 10 portfolio holdings. This figure is meant to be a measure of portfolio concentration and risk. Specifically, the higher the percentage, the more concentrated the fund is in a few companies or issues, and the more the fund is susceptible to the market fluctuations in these few holdings.
Turnover: This is a measure of the fund’s trading activity which is computed by taking the lesser of purchases or sales (excluding all securities with maturities of less than one year) and dividing by average monthly net assets. A turnover ratio of 100% or more does not necessarily suggest that all securities in the portfolio have been traded. In practical terms, the resulting percentage loosely represents the percentage of the portfolio’s holdings that have changed over the past year.
Yield: Expressed as a percentage, this figure represents a fund’s income return on capital investment for the past 12 months. It refers only to interest distributions from fixed-income securities, dividends from stocks, and realized gains from currency transactions.
Monies generated from the sale of securities or from options and futures transactions are considered capital gains, not income. Return of capital is also not considered income NMF, or No Meaningful Figure, appears in this space for those funds that do not properly label their distributions. We list N/A if a fund is less than one year old, in which case we cannot calculate yield.
Morningstar computes yield by dividing the sum of the fund’s income distributions for the past 12 months by the previous month’s NAV (adjusted upward for any capital gains distributed over the same time period).
The top holdings in the fund’s portfolio are ranked by % Net Assets.
Sector: Sector for the stock holding.
P/E: Price/earnings ratio for the stock holding.
YTD Return %: YTD return for the stock holding, updated daily.
% Net Assets: Morningstar calculates the percentage of net assets figure by dividing the market value of the security by the fund's total net assets. If a few securities take up a large percentage of the fund's net assets, the fund uses a concentrated portfolio strategy. If the percentage figures are low, then the manager is not willing to bet heavily on any particular security.
Note about portfolio dates (explanation of reporting frequency)
Morningstar makes every effort to gather the most up-to-date portfolio information from a fund. By law, however, funds need only report this information two times during a calendar year and they have two months after the report date to actually release the shareholder report and portfolio. Therefore, it’s possible that a fund’s portfolio could be up to eight months old at the time of publication. We print the date the portfolio was reported.
Older portfolios should not be disregarded, however. Although the data may not represent the exact current holdings of the fund, it may still provide a good picture of the overall nature of the fund's management style.