The Morningstar Category™ classifications were introduced in 1996 to help investors make meaningful comparisons between mutual funds. Morningstar found that the investment objective listed in a fund’s prospectus often did not adequately explain how the fund actually invested. For example, many funds claimed to be seeking “growth,” but some were investing in established blue-chip companies while others were seeking growth by investing in small-cap companies.
The Morningstar Category classifications solved this problem by breaking portfolios into peer groups based on their holdings. The categories help investors identify the top-performing funds, assess potential risk, and build well-diversified portfolios. Morningstar regularly reviews the category structure and the portfolios within each category to ensure that the system meets the needs of investors.
In the United States, Morningstar supports 64 categories, which map into four broad asset classes (U.S. Stock, International Stock, Taxable Bond, and Municipal Bond). The primary and secondary indexes listed with each category are used in Morningstar’s tools and reports to show performance relative to a benchmark.
U.S. stock funds are placed in a category based on the style and size of the stocks they typically own. The style and size parameters are based on the divisions used in the investment style box: Value, Blend, or Growth style and Small, Medium, or Large geometric average capitalization (see Equity Style Box for more details on style methodology). By reviewing their investment style over the past three years, we place U.S. stock funds in one of the following nine categories:
Leveraged Net Long
Equity Precious Metals
Global Real Estate
The primary index for this broad asset class is the Dow Jones Moderate Portfolio Index. This index has exposure to equities (generally around 60%), bonds (generally around 30%), and cash (generally around 10%). It also has exposure to both U.S. and international markets. This new broad asset class will contain the following seven categories:
Target Date 2000-2010
Target Date 2011-2015
Target Date 2016-2020
Target Date 2021-2025
Target Date 2026-2030
Target Date 2031-2035
Target Date 2036-2040
Target Date 2041-2045
Target Date 2046-2050
Target Date 2051+
Equity funds with 40% or more of their equity holdings in foreign stocks (on average over three years) are placed in the international stock class. These categories include:
Foreign Large Value
Foreign Large Blend
Foreign Large Growth
Foreign Small/Mid Value
Foreign Small/Mid Blend
Foreign Small/Mid Growth
Diversified Emerging Markets
Latin America Stock
Pacific/Asia ex. Japan Stock
Commodities Broad Basket
Commodities Industrial Metals
Commodities Precious Metals
Funds with 70% or more of their assets invested in bonds are classified as Bond Funds. Bond funds are divided into two main groups: Taxable Bond and Municipal Bond.
Taxable Bond categories include the following:
Municipal-Bond categories include the following:
Muni National Long
Muni National Intermediate
Muni National Short
Muni Single State Long
Muni Single State Intermediate
Muni Single State Short
Muni California Long
Muni California Intermediate/Short
Muni New Jersey
Muni New York Long
Muni New York Intermediate/Short
Taxable Money Market
Tax-Free Money Market
The Morningstar Category provides a more critical look at a fund’s investment approach and will help financial professionals and investors select the right combination of funds for their portfolio. The Morningstar Category is also used for defining the Morningstar Rating.
Morningstar generates this data in-house.
For the Pros
Morningstar assigns categories to all types of portfolios, such as mutual funds, variable annuities, and separate accounts. Portfolios are placed in a given category based on their average holdings statistics over the past three years. Morningstar’s editorial team also reviews and approves of all category assignments. If the portfolio is new and has no history, Morningstar estimates where it will fall before giving it a more permanent category assignment. When necessary, Morningstar may change a category assignment based on recent changes to the portfolio.
The driving principles behind the classification system are as follows:
Individual portfolios within a category invest in similar types of securities and therefore share the same risk factors (e.g. style risk, prepayment risk).
Individual portfolios within a category can, in general, be expected to behave more similarly to one another than to portfolios outside the category.
The aggregate performance of different categories differs materially over time.
Categories have enough constituents to form the basis for reasonable peer group comparisons.
The distinctions between categories are meaningful to investors and assist in their pursuit of investing goals.