Fixed-Income Style Box

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), <3.5 years; Moderate (Mod) >3.5 to 6 years; and Extensive (Ext), >6 years; 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.

Benefits

The style box for fixed-income funds offers a different interpretation on the way a fund company chooses to position a fund, such as by its name or marketing material. Style data relies upon the fund’s actual holdings, and therefore often proves to be a more accurate assessment of a fund’s investment approach.

The horizontal axis focuses on interest-rate sensitivity, as measured by the bond’s portfolio duration. (If duration is not available, the horizontal axis is based on the portfolio’s average effective maturity for taxable-bond funds and nominal maturity for municipal-bond funds.) Taxable-bond funds with durations of 3.5 years or less are limited; more than 3.5 years and less than six years, moderate; and more than six years, extensive. (Funds with an average effective maturity of four years or less qualify as limited; more than four years and up to 10 years, moderate; and more than 10 years, extensive.)

Municipal bond funds with durations of 4.5 years or less qualify as limited; more than 4.5 years and less than seven years, moderate; and more than seven years, limited. When nominal maturity is used for municipal-bond funds, the following ranges are used: less than five years, limited; more than five years and less than 12 years, moderate; and more than 12 years, extensive.

It is important to note that fixed-income style data is useful for evaluating only the bond portions of a fund’s portfolio. Thus, funds with a significant mix of stocks, bonds, and cash may have a substantial portion of their portfolios left out of the fixed-income style data. Consequently, they will be given both equity and fixed-income style data.

Origin

Morningstar generates style boxes for fixed-income funds by using data that are obtained from fund-company surveys. style boxes are recalculated on a monthly basis.

For the Pros

How Morningstar Measures Average Weighted Maturity

The average term length of a fund’s bond portfolio is based on Average Weighted Maturity (a weighted average of the adjusted maturities of the bonds in each fund’s portfolio). This statistic is calculated by weighting each bond’s maturity date by its relative size within the portfolio.

How Morningstar Measures Credit Rating

Those that have an average credit rating of AAA and AA are categorized as high quality (H). Bond portfolios with average ratings less than AA but greater than or equal to BBB are medium quality (M) and those rated below BBB are categorized as low quality (L). For the purposes of Morningstar’s calculations, U.S. government securities are considered AAA bonds, non-rated municipal bonds are classified as BB, and all other non-rated bonds are labeled B.

Equity funds usually run the range of possible style combinations, with funds from each objective varying greatly. Fixed-income funds, on the other hand, favor certain combinations over others. For example, there are far more extensive and moderate-maturity funds than limited-maturity funds, and far more funds boast high or medium credit quality than low quality.