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's second annual stewardship survey of the U.S. mutual fund industry examines the relationship between asset managers' stewardship attributes and investor outcomes and continues to find that better stewards of capital generally deliver better overall fund performance.

The recent strength of the U.S. dollar has negatively impacted the performance of international-equity funds that do not hedge their foreign-currency exposure. This paper discusses the impact of foreign-currency movements on these types of portfolios and compares the performances of currency-hedged and unhedged international-equity strategies against the history of the U.S. dollar over the past 40 years.

Eight months after Bill Gross's abrupt departure from PIMCO, Morningstar explores changes to the firm and the recent evolution of its investment team. We further address recent outflows and assess their impact on PIMCO's business model and ability to attract and retain talent.

Women are scarce among U.S. fund managers and underrepresented compared to other professions. This paper finds that, though the sample is relatively small, funds managed by women perform comparably to those managed by men.

Here we offer a framework for building an asset allocation focused on income. These portfolios may appeal to investors who are in draw down mode with their savings.

Morningstar has conducted qualitative research on 529 college-savings plans since 2004. We found that in 2014, the majority of 529 plans continued to use fixed glide paths in their widely used aged-based portfolios despite market-timing risk.

This paper discusses Morningstar's view of the 699 managed strategies investing in exchange-traded funds it tracks, giving investors and advisors insight into first-quarter industry performance in 2015.

This paper shows it's possible to reduce the risk of severe downside events without sacrificing returns. This could improve on traditional diversification.

This document presents the methodology for the Morningstar Calculated Fixed-Income Style Box, which offers investors and advisors a tool to assess credit risk and interest rate risk for fixed-income investments.

Target-date fund investors have benefitted from higher average returns and lower average fees in 2014, indicating that investors have used funds well in preparing for retirement.

Downside capture ratios can reveal how your mutual funds will perform when the stock market swoons.

Disciplined Growth Investors’ managers have built a moderate allocation strategy unlike most others.

Investors have a false impression that economic growth equals big stock gains.

This paper discusses Morningstar's view of the 699 ETF managed strategies it tracks, giving investors and advisors insight into industry performance at the end of 2014.

This paper examines the remarkable success of regional malls in the Washington, D.C. area. We consider performance barometers such as sales per square foot and tenant selection to assess their market position and outlook.

This paper studies the impact of accelerated stock price increases on future performance. Accelerated stock price increases are a strong contributor to both poor future performance and a higher probability of reversals. It implies that accelerated growth is not sustainable and can lead to drops.

Frontier-markets economies represent an earlier stage of development relative to emerging-markets economies and provide a faster-growing, better-diversified investment alternative. This paper provides an overview of the opportunities and risks involved in the mutual fund and exchange-traded fund options.

In this paper, we compare the costs of ETFs and index funds, looking at expense ratios, tracking performance, tax efficiency, and trading costs.

This paper discusses Morningstar's view of the 699 ETF managed strategies it tracks, giving investors and advisors insight into industry performance during Q3 2014.

Rating shopping is the practice of arrangers and issuers of structured debt products hiring credit rating agencies with the highest ratings or the least stringent rating level requirements. This paper examines the problem and argues that "race to the bottom" scenario has not occurred due to the strong regulatory oversight established after the financial crisis.

Deferred income annuities are designed to provide guaranteed income for life, with benefit payments beginning at a later date rather than immediately. This paper discusses the potential benefits and challenges plan sponsors, providers, and participants of defined-contribution plans face in incorporating DIAs.

The Morningstar® Stewardship GradeSM measures the extent that fund companies align their interests with fundholders, offering investors and fund a tool to assess client experience against firm practices. This paper examines the relationship between the Stewardship Grade and returns in Canadian mutual funds.

This paper discusses Morningstar's view of the 699 ETF managed strategies it tracks, giving investors and advisors insight into industry performance during Q22014.

This paper discusses the potential benefits of Expert Guidance, or professional online retirement advice, on the savings and investing decisions of individual participants of defined contribution plans, such as 401(k) plans.

Issuance activity in U.S. private-label residential mortgage-backed securities (RMBS) continues to stagnate, reflecting structural challenges including regulatory uncertanty and macroeconomic factors. This paper categorizes the hurdles facing the nonagency RMBS market according to their estimated impact and likely resolution timeline.

This paper offers evidence that investor risk aversion is time-varying and that changes in risk aversion are primarily related to changes in investor expectations instead of historical market returns.

The target-date industry has shown many signs of a maturing, stabilizing market, though there's still plenty of dynamism to be found. Target date funds continue to upend expectations, but other less-favorable trends also continue.

This paper analyzes the trend of decreasing mutual fund fees against the recent history of growing total industry assets under management.

This study focuses on measuring Tracking Efficiency in Chinese equity ETFs. In order to better evaluate Chinese ETFs, this study focuses on more than tracking methods, as it also touches upon the following factors: trading costs, product and index construction, counterparty risk, and task considerations.

Morningstar has conducted qualitative, analyst-driven research on 529 college-savings plans since 2004, providing data on 84 traditional 529 plans, which are included in this study. Assets in 529 plans continue to climb, and plan sponsors have generally hired capable asset managers to run their plans’ assets, but continues to lag that of traditional open-end mutual funds.

This paper examines the relationship between asset managers' stewardship attributes and investor outcomes, and finds that better stewards of capital generally deliver better overall fund performance.

This paper discusses Morningstar's view of the 699 ETF managed strategies it tracks, giving investors and advisors insight into industry performance at Q42013.

Financial assets such as stocks and bonds ar only one component of an investor's total economic worth. Other assets, such as human capital, real estate, and pensions often represent a significant portion of an investor's total wealth. These assets, however, are frequently ignored by practitioners when building portfolios, despite the fact that they share common risks with financial assets. This paper provides evidence that industry-specific human capital, region-specific housing wealth, and pensions have statistically significant exposures to different asset classes and risk factors.

ETF managed portfolios are investment strategies that typically have more than 50% of portfolio assets invested in ETFs. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe.

When consumption and funding levels are combined and correct modeled, the true cost of retirement is highly personalized based on each household's unique facts and circumstances, and is likely to be lower than amounts determined using traditional models.

This paper offers historical evidence to support the notion that a higher allocation to equities is optimal for investors with longer time horizons and that the time diversification effect is relatively consistent across countries, persisting for different levels of risk aversion.

Occasionally, a fund will move from one Morningstar category to another because of a significant change in its investment process that abruptly leads to a substantially different portfolio. In such cases, the fund’s star rating is treated differently than with a routine category change: it is reset and calculations begin at the date of the significant restructuring. More about our method of dealing with these restructures is described within this document.

The purpose of this study is to provide a comprehensive comparative analysis of the costs of investing in ETPs and index funds across different asset classes and sub-asset classes.

ETF managed portfolios are investment strategies that typically have more than 50% of portfolio assets invested in ETFs. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe.

Here, we present a concept that we call “Gamma,” designed to quantify the additional value that can be achieved by an individual investor from making more intelligent financial planning decisions. Gamma will vary for different types of investors and for different strategies; however in this paper we focus on five fundamental financial planning decisions/techniques: a total wealth framework to determine the optimal asset allocation, a dynamic withdrawal strategy, incorporating guaranteed income products (i.e., annuities), tax-efficient decisions, and liability-relative asset allocation optimization.

In this paper, we explore the historical relationship between employee stock ownership in 401(k) plans and subsequent company stock return on both a relative performance and risk-adjusted basis.

A Morningstar analysis of the average industry glidepath shows it will meet most retirees' spending needs, and funds with significantly different asset allocations have delivered similar returns in recent years. Other factors may contribute to these investments' relative success over the long term. A new Morningstar study of data on the firms offering the target date series suggests a tie between better stewardship practices and stronger risk-adjusted performance.

This methodology document addresses the return calculation for fixed-rate and zero-coupon bonds. The methodology does not currently address other types of bonds such as floating-note bonds, mortgage-backed and asset-backed bonds, Treasury Inflation-Protected Securities, and so on.

ETF managed portfolios are investment strategies that typically have more than 50% of portfolio assets invested in ETFs. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe.

This article addresses the issue of the alleged superiority of risk-factor-based asset allocations over the more traditional asset-class-based asset allocation.

Total portfolio refers to a portfolio with a strategic asset-allocation policy consisting of multiple asset classes implemented with various investment managers. This document outlines several methods of attributing performance, including the classic approaches of Brinson, Hood, and Beebower and Brinson and Fachler, the principles upon which today's performance attribution methodologies are founded. It describes Morningstar's recommended method, the top-down geometric method.

Research that has led to what is known as the "low volatility anomaly" in cross-sectional stocks from a similar universe indicates that volatility is not compensated with a "volatility" premium. We find evidence of a risk premium, but it depends on the definition or measure of risk. "Tail risk" measures the probability of having significant losses and should be what investors care about the most. We investigated several risk measures, including volatility and tail risk, and found that volatility is not compensated but tail risk is compensated with higher expected return in both U.S. and non-U.S. equity funds.

The Global Fund Investor Experience report measures the experiences of mutual fund investors in 24 countries in North America, Europe, Asia, and Africa. Morningstar researchers evaluated countries in four categories—regulation & taxation, disclosure, fees & expenses, and sales & media.

Morningstar has conducted qualitative, analyst-driven research on 529 college-savings plans since 2004 and has transitioned to a new ratings scale. The Morningstar Analyst Rating® for 529 College-Savings Plans is the summary expression of our forward-looking analysis of a 529 college-savings plan.