Equity Investment Style
Traditionally, Morningstar has used the Equity Style Box to classify funds based on their underlying holdings. However, to offer a more complete picture of how the fund’s holdings are distributed, Morningstar has developed Ownership Zones.
Style Zones are the shaded area of the Style Box, intended to be a visual measure of a fund's style scope - that is, the primary area of ownership on the Style Box. Some key points to remember are that it encompasses 75% of the stock holdings in the fund, and that it is centered around a centroid, using an asset-weighted calculation.
Observing where the Style Zone falls within the Equity Style box is useful because many funds which appear similar in size and style may actually include quite different security types. For example, it’s expected that a fund holding mainly large-cap growth stocks would behave differently than one containing both large-and mid-cap value stocks, yet both funds might be classified as large-cap growth.
Over a period of time, the shape and location of a fund’s ownership zone varies. This movement is a good indicator of how consistent a fund’s style is.
The fund centroid, appearing in the center of the Style Zone, represents the weighted average of all the fund’s holdings. The centroid’s position is used to assign a fund to one of the nine Style Box categories.
Calculating the Centroid
A fund's size (its y or vertical placement) is determined by calculating the asset-weighted size score of the size scores. Likewise, a fund's style (x or vertical placement) is determined by calculating the asset-weighted average of the stocks’ net value/growth scores determines a fund’s horizontal placement—value, growth, or blend.
The plot of the resulting style and size score on the Style Box grid is called the centroid. Here's the calculation for x and y (same for both):
y = sum(yi*wi)
Where:
yi= size score for ith stock
wi = style score for ith stock.
Morningstar Style Box Overview
The Equity Style Box is a nine-box matrix that displays the weighted portfolio stock and mutual fund investment methodology and the size of the companies in which they invest. Combining these two variables offers a broad view of a portfolio's equity holdings and risk. For a complete explanation of how we calculate the Equity Style Box for stocks and stock funds, see the Morningstar Style Box topic.
Valuations
The following are the five value factors used to calculate the Morningstar Style Box.
Price/Projected Earnings: For portfolios, this data point is calculated by taking an asset-weighted average of the earnings yields (E/P) of all the stocks in the portfolio and then taking the reciprocal of the result.
Price/Book (Projected): For portfolios, this data point is calculated by taking an asset-weighted average of the book value yields (B/P) of all the stocks in the portfolio and then taking the reciprocal of the result.
Price/Sales (Projected): For portfolios, this data point is calculated by taking an asset-weighted average of the sales yields (S/P) of all the stocks in the portfolio and then taking the reciprocal of the result.
Price/Cash Flow (Projected): For portfolios, this data point is calculated by taking an asset-weighted average of the cash flow yields (C/P) of all the stocks in the portfolio and then taking the reciprocal of the result.
Dividend Yield (Projected): For portfolios, this data point is calculated by taking an asset-weighted average of the dividend yields of all the stocks in the portfolio.
Growth Rates
The following are the five growth factors used to calculate the Morningstar Style Box. For portfolios, these figures are share-weighted averages of all the stocks in the current portfolio, because the share-weighted average is more accurate than an asset-weighted average for these types of calculations.
Long Term Projected Earnings Growth: The long-term projected earnings growth rate for a stock is the average of the available third-party analysts’ estimates for three- to five-year EPS growth.
Historical Earnings Growth: The historical earnings growth rate for a stock is a measure of how the stock’s earnings per share (EPS) has grown over the last five years. Morningstar uses EPS from continuing operations to calculate this growth rate.
Book Value Growth: The book value growth rate for a stock is a measure of how the stock’s book value per share (BVPS) has grown over the last five years. Book value growth is one of the five growth factors used to calculate the Morningstar Style Box.
Sales Growth: The sales growth rate for a stock is a measure of how the stock’s sales per share (SPS) has grown over the last five years. Sales growth is one of the five growth factors used to calculate the Morningstar Style Box.
Cash Flow Growth: The cash flow growth rate for a stock is a measure of how the stock’s cash flow per share (CFPS) has grown over the last three to five years.
Geometric Average Capitalization ($Mil)
Morningstar defines the overall "size" of a stock fund's portfolio as the geometric mean of the market capitalization for all of the stocks it owns. It's calculated by raising the market capitalization of each stock to a power equal to that stock's stake in the portfolio. The resulting numbers are multiplied together to produce the geometric mean of the market caps of the stocks in the portfolio, which is reported as geometric average cap.
This number is different from the fund's median market cap—the capitalization of the median stock in its portfolio. The geometric average cap better identifies the portfolio's "center of gravity." That is, it provides more accurate insight into how market trends (as defined by capitalization) might affect the portfolio.
Asset Allocation
% Cash
This data point identifies the percentage of the fund’s net assets held in cash. Cash encompasses both actual cash and cash equivalents (fixed-income securities with a maturity of one year or less) held by the portfolio plus receivables minus payables. Negative percentages of cash indicate that the portfolio is leveraged, meaning it has borrowed against its own assets to buy more securities or that it has used other techniques to gain more than 100% exposure to the market.
% Stocks
The percentage listed under the heading Stocks incorporates only the portfolio’s straight common stock holdings.
% Bonds
This data point identifies the percentage of the fund’s net assets held in bonds. Bonds include everything from government notes to high-yield corporate bonds.
% Other
Other includes preferred stocks (equity securities that pay dividends at a specific rate) as well as convertible bonds and convertible preferreds, which are corporate securities that are exchangeable for a set amount of another form of security (usually common shares) at a prestated price. Other also may denote holdings in not-so-neatly-categorized securities, such as warrants and options.
% Foreign
When listed, this data point reflects only the percentage of a portfolio's stock holdings that are held in foreign stocks and is calculated from the fund's most recent portfolio. Foreign stocks includes bonds that are convertible into equity, as well as convertible preferreds.
Sector Weightings
Sector Weightings
Morningstar divides the economy into three super sectors and 11 sub-sectors. Read the global equity classification methodology.
Cyclical
Basic Materials: Companies that manufacture chemicals, building materials and paper products. This sector also includes companies engaged in commodities exploration and processing. Companies in this sector include ArcelorMittal, BHP Billiton and Rio Tinto.
Consumer Cyclical: This sector includes retail stores, auto and auto parts manufacturers, companies engaged in residential construction, lodging facilities, restaurants and entertainment companies. Companies in this sector include Ford Motor Company, McDonald’s and News Corporation.
Financial Services: Companies that provide financial services which includes banks, savings and loans, asset management companies, credit services, investment brokerage firms, and insurance companies. Companies in this sector include Allianz, J.P. Morgan Chase and Legg Mason.
Real Estate: This sector includes mortgage companies, property management companies and REITs. Companies in this sector include Kimco Realty Corporation, Vornado Realty Trust and Westfield Group.
Sensitive
Communication Services: Companies that provide communication services using fixed-line networks or those that provide wireless access and services. This sector also includes companies that provide internet services such as access, navigation and internet related software and services. Companies in this sector include AT&T, France Telecom and Verizon Communications.
Energy: Companies that produce or refine oil and gas, oil field services and equipment companies, and pipeline operators. This sector also includes companies engaged in the mining of coal. Companies in this sector include BP, ExxonMobil and Royal Dutch Shell.
Industrials: Companies that manufacture machinery, hand-held tools and industrial products. This sector also includes aerospace and defense firms as well as companies engaged in transportations and logistic services. Companies in this sector include 3M, Boeing and Siemens.
Technology: Companies engaged in the design, development, and support of computer operating systems and applications. This sector also includes companies that provide computer technology consulting services. Also includes companies engaged in the manufacturing of computer equipment, data storage products, networking products, semi¬conductors, and components. Companies in this sector include Apple, Google and Microsoft.
Defensive
Consumer Defensive: Companies engaged in the manufacturing of food, beverages, household and personal products, packaging, or tobacco. Also includes companies that provide services such as education & training services. Companies in this sector include Philip Morris International, Procter & Gamble and Wal-Mart Stores.
Healthcare: This sector includes biotechnology, pharmaceuticals, research services, home healthcare, hospitals, long-term care facilities, and medical equipment and supplies. Companies in this sector include Astra Zeneca, Pfizer and Roche Holding.
Utilities: Electric, gas, and water utilities. Companies in this sector include Electricité de France, Exelon and PG&E Corporation.
Top 25 Holdings
Turnover
This is a measure of the separate account’s trading activity which is computed by taking the lesser of purchases or sales (excluding all securities with maturities of less than one year) and dividing by average monthly net assets. A turnover ratio of 100% or more does not necessarily suggest that all securities in the portfolio have been traded. In practical terms, the resulting percentage loosely represents the percentage of the portfolio’s holdings that have changed over the past year.
Top 25 Holdings
The top 25 holdings in the subaccount's portfolio are ranked by the % Net Assets.
Sector: Sector for the stock holding.
P/E: Price/Earnings ratio for the stock holding.
YTD Return %: YTD return for the stock holding, updated daily.
% Net Assets: The Percent Net Assets column indicates what percentage of the portfolio's net assets a given security constitutes. Morningstar calculates the percentage of net assets figure by dividing the market value of the security by the separate account's total net assets. If a given security makes up a large percentage of the separate account's net assets, the separate account uses a concentrated portfolio strategy, at least with respect to the security in question. If, however, the percentage figures are low, then the manager is either maintaining per-issue diversification or is simply not willing to bet heavily on a particular security.
Use the Percent of Net Assets column to see how concentrated or diversified a separate account is in terms of a particular security. When used in conjunction with the Total Number of Holdings column, this data point can be particularly useful.
% Assets in Top 10 Holdings: The aggregate assets, expressed as a percentage, of the separate account's top 10 representative holdings. This figure is meant to be a measure of portfolio risk. Specifically, the higher the percentage, the more concentrated the separate account is in a few companies or issues, and the more the separate account is susceptible to the market fluctuations in these few holdings. The figure is calculated from the most recent available separate account holdings.
The Percent Assets in Top 10 Holdings figure provides insight into the degree to which a portfolio is diversified. Used in combination with the total number of holdings, it can indicate how concentrated a separate account is.