Morningstar Category - VA/L Subaccounts

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 47 categories for VA/L subaccounts, which map into three broad asset classes (U.S. Stock, International Stock, and Taxable 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 Subaccounts

U.S. Stock subaccounts 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 size (see the Morningstar Style Box definition for more details on style methodology).

By reviewing their investment style over the past three years, we place U.S. Stock subaccounts in one of the following nine categories:

 

Large Value

Large Blend

Large Growth

Mid-Cap Value

Mid-Cap Blend

Mid-Cap Growth

Small Value

Small Blend

Small Growth

 

Morningstar also includes several other, specialized categories, including:

Bear Market

Long-Short

Specialty Communications

Specialty Financials

Specialty Health

Specialty Natural Resources

Specialty Real Estate

Specialty Technology

Specialty Utilities


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:

Conservative Allocation

Convertibles

Moderate Allocation

Target-Date 2000-2014

Target-Date 2015-2029

Target-Date 2030+

World Allocation


International Stock Subaccounts

Stock subaccounts with 40% or more of their equity holdings in international stocks (on average over three years) are placed in one of the following international-stock categories:

Diversified Emerging Markets

Diversified Pacific/Asia

Europe Stock

Foreign Large Value

Foreign Large Blend

Foreign Large Growth

Foreign Small/Mid Value

Foreign Small/Mid Growth

Japan Stock

Latin America Stock

Pacific/Asia ex. Japan Stock

Specialty Precious Metals

World Stock


Fixed-Income Subaccounts

Subaccounts with 70% or more of their assets invested in bonds are classified as fixed-income subaccounts and include:

Long Government

Intermediate Government

Short Government

Long-Term Bond

Intermediate-Term Bond

Short-Term Bond

Ultrashort Bond

Bank Loan

Emerging-Markets Bond

High-Yield Bond

Multisector Bond

World Bond

Inflation-Protected Bond


Finally, the Morningstar Category for VA/L subaccounts includes a Money-Market Category.


Benefit

Morningstar Categories provide a more critical look at a subaccount’s investment approach, and will help financial professionals and investors to select the right combination of subaccounts for their portfolio. Morningstar Categories are also used for defining the Morningstar Rating.


Origin

Morningstar generates this data in house. We calculate category averages on a monthly basis.


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: