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.

The paper describes how closed-end fund distributions are factored into the toal return calculations for net asset values and share prices.

The paper describes how total returns for net asset values and share prices of closed-end funds are adjusted when a closed-end fund undertakes a rights offering.

The Morningstar Canada Liquid Bond Index (MCLBI) is designed to provide diversified exposure to Canadian dollar denominated federal, provincial, government-guaranteed and corporate debt with an eye toward liquidity.

The paper outlines Morningstar's equity data definitions.

A master-feeder fund structure allows asset managers to consolidate multiple portfolios into one, therefore realizing economies of scale, resulting in more efficient and effective investment management and achieving operational cost & tax efficiency

The paper discusses the characteristics of virtual share class shares which have no independent legal profile of their own and are identical in all other respects to the base currency class of the fund.

Effective June 30, 2003 Morningstar replaced median market capitalization with geometric average capitalization as a measure of size for a fund's portfolio.

The paper details Global Industry Classification (GICS) four level breakdown.

The paper describes the use of Monte Carlo simulations in determing investor wealth in EnCorr.

Diversified U.S. equity funds and diversified foreign equity funds are categorized based on the three-year average of the fund’s Style Box coordinates (Raw X Value-Growth Score, Raw Y Size Score).

The paper outlines category definitions applicable to the Hong Kong market.

The paper outlines category definitions applicable to the Spanish market.

To help investors understand the different levels of risk of investing in the various categories of funds, Morningstar will calculate a risk level for each of its fund peer group.

Each security in a fund portfolio is assigned a detailed asset classification, known as the Detail Type Id. In September 2011 Morningstar updated the list of Detail Type codes.

In MM, 2010 Morningstar introduced a new percentile ranking methodology called Distinct Portfolio Category Ranks.

Performance attribution analysis consists of comparing a portfolio's performance with that of a benchmark and decomposing the excess return into pieces to explain the impact of various portfolio management decisions.

The paper outlines different expense ratio applicable to managed products.

Morningstar places fixed income funds in one of the nine squares of the Morningstar Style Box based on each fund’s duration and average credit quality.

In Canada, Fixed Income funds that are displayed on Morningstar tools may be subject to two different methodologies depending on which tool they appear on.

The Morningstar Style Box provides an intuitive visual representation of style that helps investors build better portfolios and monitor them more accurately

The updated Morningstar Style Box provides an intuitive visual representation of style that helps investors build better portfolios and monitor them more accurately. This methodology document addresses the Morningstar Fixed-Income Style Box™. The Morningstar Style Box helps investors and advisors determine the investment style of a fund.

The data that drive 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 and allocation funds.

The paper outlines global category definitions.

Morningstar’s proprietary classification system is comprised of 11 sectors, 69 industry groups and 148 industries.

Sector groups and sectors can be defined by the parameters detailed in the methodology and based on the portfolio statistics of the most recent portfolio holdings data

There are multiple ways to define a fund’s inception date for purposes of return and ratings calculations.

Portfolio diversification is generally thought of in terms of market capitalization and investment style, yet sector diversification is equally important.

The Morningstar Manager Benchmarks offer a distinct view into a full range of managed investments for incisive performance, portfolio, and operations data analysis that better captures how money mangers and consultants view the manager and investment universes.

Numerous academic studies have shown the existence of a momentum effect in stock performance.

Investors often evaluate how reasonable a stock’s price is by looking at a price ratio, such as price-to-earnings (P/E), price-to-book (P/B), price-to-cash flow (P/C), or price-to-sales (P/S).

All managed products are subject to the risk that they may lose value because of the strategies they pursue, the types of securities they invest in, and the uncertainties of investing in general.

Morningstar's Strategy Database identifies investment undertakings managed by a single team following the same investment process.

Synthetic ETFs are exchange-traded funds that use over-the-counter derivatives to replicate an index return.

The Federal Reserve Board publishes a group of Treasury bond interest rates of various maturities. These are named Treasury Constant Maturities, the best known being the Ten-Year Treasury Constant Maturity.

For an investor, risk is not merely the volatility of returns, but the possibility of losing money.

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.

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

Morningstar Indexes were created to provide investors with accurate benchmarks for performance measurement, as well as offering discrete building blocks for portfolio construction.

Morningstar’s aim is to help investors determine a Listed Investment Companies (LICs) overall investment merit to help them construct diversified portfolios and achieve their goals.

The paper details Morningstar's custom yield calculation.

This document supplements the methodology document for the Morningstar Style BoxTM. This provides additional information about how to rescale the size score for a fund

The Sector Delta is an equilateral triangle that depicts a portfolio’s super sector allocation, relative to a benchmark, on a two dimensional space.

When it comes to the benchmarking of target maturity funds, the cart has been in front of the horse.

Morningstar has a rich tradition of holdings-based analysis of mutual funds and other investment portfolios. The portfolio holdings provide insight into the manager’s strategy and help investors determine if an investment might be appropriate for them.

The Similar Funds tool will generate a list of investments that are similar to a user-specified offering. This methodology is based upon several factors including the category, special criteria, portfolio allocation, and performance of the fund provided.

An essential complement to our database of investment information and our suite of quantitative research tools, Morningstar's target-date series analysis focuses on helping fiduciaries make better investment decisions with plan participants' retirement funds

In its annual Target-Date Industry Survey, Morningstar shines a sweeping light across target-date funds, which have become a primary tool for Americans’ retirement savings.

A commonly used measure of return volatility is the standard deviation of monthly returns multiplied by to express it in the same unit as annual return

Morningstar’s UIT composite return combines the returns of each series within a strategy to measure how the strategy has performed over different time periods