The hypothetical illustration allows advisor users to develop investment scenarios over past historical periods for presentation to clients. The hypothetical illustration may involve individual securities or a portfolio of securities.
Upon entry of client variables, the user is able to generate a report that includes a summarization of the assumptions made by the advisor, a graphic showing the behavior of the investment over the time period selected under the assumptions provided, and a table showing the detail of inflows and outflows to the investment.
User Inputs
The following variables are determined/selected by the advisor user in advance of hypothetical report generation. Most, but not all, of these options are exhibited in the report.
Report Options:
Report title
Client name
Investment vehicle name(s)
Data summation frequencies
Hypothetical Details:
Starting and ending investment date for each security in the illustration
Currency of the investment
Initial investment amount for each security included in the illustration
Systematic investments or withdrawals from the securities—amounts, frequency, timing, methodology for increases in amount of systematic investment/withdrawal
Custom investments or withdrawals (month/year, amount)
Reinvestment policy for dividends
Liquidation option at ending investment date
Rebalancing/transfer details
Sales charge options: apply mutual fund loads*, annual fee, or custom charges.
*Mutual fund loads for the funds selected are culled from the Morningstar database and presented to users when selecting among the options.
Hypothetical Methodology
The hypothetical illustration demonstrates the change in value of the hypothetical investment or portfolio of investments over the time period selected by the user, given the user’s assumptions.
New Investment
For mutual funds, investments are based upon the NAV of the mutual fund on the date of investment or withdrawal.
Distribution/Withdrawal
Dividend distributions are assessed in the illustration as earned historically by a fund/stock and applied in proportion with the number of shares/units owned as of the date of distribution. Tax liabilities resulting from this transaction are saved and applied later (as explained below).
Withdrawals take into account the NAV on the date of withdrawal and impact the number of remaining shares/units remaining in the investment vehicle. Back-end loads applicable to the withdrawal are assessed at the time of withdrawal. Back-end loads are from Morningstar’s database, but can be disabled by the user.
Total Reinvestment
Dividends may be reinvested at the user’s discretion. These transactions are recorded on the day of distribution. Number of shares purchased with the distributions are impacted by current NAV.
Charges & Fees
Sales charges are impacted by the user option selected, as indicated above. Standard front-end and back-end fees for the funds are pulled from Morningstar’s database, originally from the fund, and applied as appropriate.
For mutual funds, front-end fees are satisfied first and the remaining value is invested in the fund. Back-end and redemption fees are deducted from any withdrawal made by the investor.
Annual Asset-Based Fees are included in this calculation. The sale of shares to pay fees can trigger a tax liability.
Market Value
This is the value of the security/portfolio at the end of the month following all transactions, calculated by multiplying NAV times the number of remaining shares/units in the portfolio. Pulled from Morningstar’s database and originally from the fund company, transfer agencies, or NASDAQ.
Total Return
Total return is the internal rate of return of the security/portfolio at the end of each reporting period. When reported in increments of less than a year, total return is a cumulative figure. When reported in increments of greater than 12 months (for example, the holding period return), the number is annualized. Total return is internal rate of return calculated by Morningstar taking into account all of the inflows from and outflows to the investor during the holding period considered.