Methodology Documents

Morningstar has conducted research on active and passive investment strategies and their associated vehicles since 1986.

This paper outlines the key assumptions and details behind our quantitative equity rating methodology.

We believe that a company's intrinsic worth results from the future cash flows it can generate. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic worth--or fair value estimate, in Morningstar terminology.

This document describes the rationale for, and the formulas and procedures used in, calculating the Morningstar Rating for funds (commonly called the “star rating”). This methodology applies to funds receiving a star rating from Morningstar.

This paper outlines the key assumptions and details behind our quantitative equity rating methodology.

Morningstar developed the Morningstar Equity Comparables system to give investors and financial professionals an objective benchmark for comparing companies. Morningstar Equity Comparables is genuinely different to other industry classification schemes. We start from the bottom up with comparable companies, as opposed to the top down with sector definitions. For every pair of companies, we determine how similar they are–anywhere from closely comparable to distantly related based on automated analysis of the companies' own business description. We automatically analyse the text of the business description and work out whether companies are talking about similar things as they describe their businesses. Businesses described in similar terms are comparable.

Morningstar aims to meet growing regulatory demand by providing a method of ranking the universe of funds available for sale in a target market or regulatory jurisdiction.

As the field of sustainable investing matures, Morningstar continues to evolve its data, research and analytics to help investors assess the ESG risks and attributes in their portfolios.

Morningstar has conducted qualitative, analyst-driven research on 529 plans since 2004. Since July 2012, we have expressed this research through the Morningstar Analyst Rating for 529 College-Savings Plans accompanied by written analysis. An essential complement to our database of investment information and our suite of quantitative research tools, such as the Morningstar Rating for 529 investment options, Morningstar's 529 plan analysis has always focused on helping individuals saving for education expenses make better investment decisions.

Fixed income investors can find their portfolios exposed to many different types of risk. These risks can affect whether their investment objectives are achieved. Portfolio breakdowns are a traditional means of analyzing risk. They have a critical shortcoming, however, in that they hide the way individual risks are interrelated. Fixed Income Exposure Analysis solves for this shortcoming by combining attribute breakdowns and calculating related risks. The relationships between different risk types are revealed, allowing investors to understand with greater precision and detail the contributors of risk and return that have an impact on portfolio performance.

Explanation of the methodology behind the Morningstar distribution analysis fields.

The Morningstar Category™ classification system for funds lets institutions, advisers and investors effectively compare like funds.

The Morningstar Category™ classification system for funds lets institutions, advisers and investors effectively compare like funds.

This methodology is applied to HK MPF Funds.

Morningstar Category classifications sorts 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. Here is how those categories are

The Homochronic Recessed Smoothing Ensemble and Corrective Autoregression Transfer function methodology provides a general framework for electricity load and price forecasts.

To help investors better analyze managed funds along the increasing number of factor dimensions, we introduce the Morningstar Factor Profile, a scientific and intuitive tool to capture the factor exposures of investment portfolios.

Morningstar Sustainability Pillar Scores

Morningstar Category Flow Model

Morningstar is making revisions on the industry group and industry level in response to market and technology changes. The revised system calibrates the classifications to align more closely with industry standards, clarifies industry definitions, and better reflects industry trends to allow for a more accurate grouping of companies based on market behavior.

Morningstar enhances the current Morningstar Sustainability Rating methodology by replacing Sustainalytics' company ESG Rating with its ESG Risk Rating.

Morningstar is enhancing the current Morningstar Sustainability Rating methodology by replacing Sustainalytics' company ESG Rating with its ESG Risk Rating.

A company’s Business Country is a vital data point and is used throughout Morningstar’s products and methodology.

Target-date funds are designed to be a simple, all-in-one solution that is relatively easy for investors to use. However, these simplifying features can make target-date funds tricky to evaluate. Morningstar Target-Date Fund Series Reports ("the Reports") are designed to help individual investors, financial advisors, consultants, plan sponsors, and other interested fiduciaries make informed decisions when selecting a series of target-date funds.

The ability to model the risk of a portfolio is paramount to making investment decisions that maximize utility. Our fundamental factor-based methodology provides a way to forecast risk, but, more important, it provides an intuitive interpretation of the mechanics behind the forecast.

Examining the Morningstar Quantitative Rating for Funds

The paper outlines category definitions applicable to the Indian Insurance fund.

The Morningstar Category™ classification system for funds lets institutions, advisers and investors effectively compare like funds.

In 2018, we released our fund flow models into Morningstar's Investor Pulse tool starting with the U.S. market and expanding globally. Based off "The Fall of Funds" paper, we are implementing the probability of fund shutdown model so these insights can be gleaned in a live setting. The first fund shutdown model implemented is for the U.S. equity market.

Morningstar methodology paper explaining the load adjusted return calculations.

Methodology document for the income and capital return calculations

October's $29.1 billion in long-term outflows were the greatest since August 2015

Details about ratings on these vehicles.

Morningstar’s goal for this data set is to consistently provide country level geographic segment data that can be used to calculate a company or portfolio’s economic exposure to different geographic regions.

Fund-level calculation methodology.

Methodology behind the Morningstar US closed end fund peer groups and calculation on peer group indices.

The following document explains the circumstances under which Morningstar considers funds and the indexes they track eligible for collection of Index Strategy, Index Weighting, and Strategic Beta Group. The document also details how assignment is determined and regularly reviewed. This document represents Morningstar’s position on the subject; it is not a summary of local regulations.

Methodology supplement for clients.

Morningstar developed the Morningstar Equity Comparables system to give investors and financial professionals an objective benchmark for comparing companies. Morningstar Equity Comparables is genuinely different to other industry classification schemes. We start from the bottom up with comparable companies, as opposed to the top down with sector definitions. For every pair of companies, we determine how similar they are–anywhere from closely comparable to distantly related based on automated analysis of the companies' own business description. We automatically analyse the text of the business description and work out whether companies are talking about similar things as they describe their businesses. Businesses described in similar terms are comparable.

This iteration of Morningstar's first energy-based quantitative model explores the improvements proposed in the first quantitative modeling white paper.

Investors continue to favor taxable-bond funds.

This Morningstar tool calculates the impact of user-specified macroeconomic and financial system shocks on forecast factor exposures and volatilities. The user can specify multiple shocks at different points in time and calculate the subsequent expected risk and return of the portfolio.

Stock Market Outlook: Left-Behind Communication Services Offers the Most Value Today

Long-term flows to U.S. open-end and exchange-traded funds dipped to an estimated $22.2 billion in August 2018 following July's $32.1 billion

After last month's outflows, long-term U.S. open-end and exchange-traded funds collected $32.1 billion in inflows.

Investors continue to favor plain-vanilla strategies

Long-term U.S. open-end funds and exchange-traded funds had $22.1 billion in outflows, their greatest outflows since August 2015

The Market-Driven Scenario Analysis tool allows users to select a market index and to specify the percentile dividing the range of the return distribution to determine the impact of user-specified market shocks on factor exposures, portfolio returns, and Value at Risk.

This paper seeks to outline the methodology Morningstar uses in calculating the expected future yield as of the portfolio date, from the holdings of the portfolio. The measure is based on Forward Dividend Yield (forward-yield) for stocks and the yield-to-maturity of the fixed income portfolio.

We agree that there's much to be skeptical of with the original robo-advisor business model. In fact, we wrote in 2015 about the challenging economics, how many stand-alone robo-advisors wouldn't survive, and robo-advisors integrated with established financial institutions would leapfrog the early leaders. However, new business models are addressing the three faults of the original robo-advisor model: high client acquisition costs, ongoing costs of servicing clients, and low revenue yield on client assets. Lead-generation tools and strategic partnerships are reducing acquisition costs, while building for scale and operating leverage eventually solves service costs. Revenue-enhancement strategies underpin much of our optimism for select robo-advisors becoming profitable. Upselling to human advice, ancillary service offerings, and incorporating proprietary products in portfolios are key revenue drivers. We don't see robo-advisors disrupting moaty financial institutions. Instead, we expect established financial institutions will co-opt the technology and user experience improvements of robo-advisors to expand their own businesses. Among the asset management, wealth management, and online brokerage firms that we cover, we believe Invesco, Credit Suisse, and UBS are trading at the most attractive valuations.

U.S. Equity Inflows Surge, While International-Equity and Taxable-Bond Flows Tail Off

Morningstar's cross-listed ETP performance methodology.

Here is the methodology for this designation, which is assigned to portfolios that have low carbon-risk scores and low levels of fossil-fuel exposure.

Fiduciary responsibility and increased regulations require investors to analyze and understand their risk exposures in a carbon-constrained future. To help investors address this challenge, Morningstar has introduced portfolio carbon metrics that measure the risk that companies in a portfolio face from the transition to a low-carbon economy.

Methodology paper explaining how Morningstar calculates the average bond price for a portfolio.

Morningstar ETF Managed Portfolios Landscape Report Q4 2017