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Morningstar Category - Funds

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

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:

Sector Stock

Equity Precious Metals

Balanced

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:

Convertibles

Conservative Allocation

Moderate Allocation

Aggressive Allocation

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+

Retirement Income

International Stock

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

World Stock

Diversified Emerging Markets

Diversified Pacific/Asia

Europe Stock

Latin America Stock

Pacific/Asia ex. Japan Stock

Alternative

Trading==Leveraged Commodities

Trading==Inverse Commodities

Trading==Leveraged Debt

Trading==Inverse Debt

Trading==Leveraged Equity

Trading==Inverse Equity

Trading==Miscellaneous

Commodities

Commodities Agriculture

Commodities Broad Basket

Commodities Energy

Commodities Industrial Metals

Commodities Miscellaneous

Commodities Precious Metals

Bonds

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:

Long Government

Intermediate Government

Short Government

Long-Term Bond

Intermediate-Term Bond

Emerging-Markets Bond

Nontraditional Bond

Inflation-Protected Bond

Municipal-Bond categories include the following:

Muni National Long

Muni National Intermediate

Muni National Short

High-Yield Muni

Muni Single State Long

Muni Single State Intermediate

Muni Single State Short

Muni California Long

Muni California Intermediate/Short

Muni New York Intermediate/Short

Muni Ohio

Muni Pennsylvania

Money Market

Taxable Money Market

Tax-Free Money Market

Benefit

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.

Origin

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.