Dear Morningstar Clients,
This e-mail contains Morningstar Data Release Notes for October 2003. As always, we invite your comments and questions on our communications, products and services. Please contact any member of your account team. Thank you.
Your Morningstar Team
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Morningstar(R) Data Release Notes - October 2003
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*Morningstar Rating(TM) for Separate Accounts
This week, Morningstar introduced the Morningstar Rating for separate accounts, which is based on our proprietary risk-adjusted return methodology. The new Rating gives professional investors a tool to help idenfity separate accounts that are worthy of further research and to conduct peer group analysis based on the Morningstar Categories. We also introduced the Morningstar Flexibility Measure(SM) for separate accounts, "flex measure," a proprietary statistic that helps investors measure the level of customization that each separate account offers. These new tools for separate accounts are available with September data in DataLab, in the November release of Principia(R) Separate Accounts, and will appear in Advisor Workstation(SM) by year-end. Data licenses and Profile pages are also available. If you would like more information or a copy of our press release or fact sheet, please contact your Morningstar representative.
*Fund Category Review
The next quarterly Category Review will begin on November 13, with the appeal period running from November 14 through November 20. This review will include all funds except those recently assigned to the new foreign stock categories in August. Complete details and instructions will be sent via email on November 13, and new categories will be effective with November month-end processing.
*Upcoming Data and Methodology Changes
As you know, Morningstar is committed to ongoing improvement in our processes and our data. Our research department regularly scrutinizes various data, and makes improvements they think will add value for investors. Listed below are several improvements that have been implemented in the database, or will take place in the near future.
*Prospectus Objective Consolidation
Effective with October month-end processing and available in November, we have consolidated the number prospectus objectives. The codes remain the same, field length remains 32 characters, and the record layout will not change. Please see the attached excel file for complete details. As always, for a more detailed description of investment objectives, we encourage you to refer your investors to the Morningstar Category.
*Change to Portfolio Measures
Effective with October month-end processing and available in November Data Feed deliveries, Morningstar will be implementing methodology changes to some of the equity portfolio statistics. Morningstar will replace the last legacy price ratios and growth rates with the enhanced Value and Growth portfolio measures introduced in May 2002 with the new Morningstar style model. The number of data points and the record layout and field length are unchanged.
Morningstar chose the calculations from the 10-factor style model rather than other measures of price ratios or growth because the data is more relevant and timely. For example, Morningstar used to report price ratios for funds that were based on the underlying stocks' performance over the trailing twelve-month period (for earnings, book value, sales, etc.). The new price ratios are based on projections rather than historical data. A forward-looking measure is critical to any price ratio, because the market does not trade on history as much as it trades on future projections for each stock.
Similarly, the growth rates from the 10-factor style model are more representative of each stock's growth rate, because these measures give more weight to more recent growth. Morningstar measures growth as the average of each periodic growth rate over a span of five years (e.g. y5 to y1, y4 to y1, y3 to y1, etc.). This puts more weight on the stock's recent growth compared to a simple annualized growth rate that treats each year equally.
We will no longer be supporting P/E for foreign funds.
Lastly, Morningstar will now calculate fund-level averages for return-on-assets, return-on-equity, debt-to-cash, and net margin based on stocks' trailing 12-month financial data rather than fiscal year-end data. This ensures that the underlying stock data for these calculations will be more current, because it will be updated quarterly, rather than yearly. Therefore, you may notice more variance in the fund averages from month to month as this enhancement means we are able to provide you with fresher data.
These changes will be reflected on Investment Profile(TM) pages with January deliveries of December 31, 2003 data.
*Bond Sectors
On February 29, 2004, Morningstar will introduce a new sector breakdown for bond funds. This new layout will offer more detail about the various types of assets held by domestic bond funds. It includes the following sectors:
1 US Treasury
2 Agency Debt
3 Mortgage Pass-thru
4 Mortgage CMO
5 Mortgage ARM
6 US Corporate
7 Asset-backed
8 Foreign Corporate
9 Foreign Govt
10 Municipal
11 Convertible
12 Cash
The sector breakdown is expressed as a percentage of the fund's total assets in bonds and cash. It will be provided for all domestic taxable funds (including the categories Moderate Allocation, Conservative Allocation, Bank Loan, High Yield, and Multisector, but excluding international, convertible, and municipal bond funds). This new data will replace the current government bond sector breakdown (US Treasury, GNMA, FNMA, FHLMC, CMO, ARM, Other), which was fairly limited in scope. The new sector breakdown will give investors more detail about how certain funds are invested.
*Share Class Consolidation
Effective February 28, 2003 we are consolidating share classes into the 14 categories listed below. We will continue to reflect the registered name of the share classe, for example, ABC Mgmt. Co. Aggressive Growth Intsl. Serv. Class II (abbreviations may be necessary), but will group it with other institutional share classes using the codes below. If you need the descriptions for any of the codes listed, please contact your account team.
1 A
2 B
3 C
4 Inst
5 D
6 Adv
7 Inv
8 Retirement
9 S
10 T
11 M
12 N
13 Other
14 "No Load"
Note: To designate the oldest distinct share class in our database, the system looks for the oldest inception date. If a fund has several share classes with that same inception date, the system will use the sequence of the list above to determine the oldest share class. For example, if share classes B, C and Retirement share an inception date, B will be designated �oldest distinct share class.�
*Tax Rate Changes
The Jobs and Growth Tax Relief Reconciliation Act of 2003 calls for different tax treatments for qualified dividends and new tax rates for income, dividends, and capital gains. As previously communicated, effective November 30, Morningstar will begin using the new tax rates and qualified dividends in our after-tax calculations. The November 30 launch will also include new quarter-end returns (up through September 30) that are based on the new tax rates. Please see the attached document with a brief explanation of the changes. Also attached is Morningstar's methodology for after-tax returns.
*Tax Rate Change and Data Submission
In order to ensure that your funds' after-tax returns are shown correctly in Morningstar products, please be sure that your operations team submits detailed distribution data to Morningstar using the new performance file template we supplied in June. If you would like another copy of the template, please contact your account team.
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Recap of Previous Announcements
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Effective September 30, Morningstar introduced five new style-based foreign categories to help investors differentiate between the many foreign stock funds now available. These five new categories replaced the Foreign Stock category across all data universes. The categories and letter codes are as follows: Foreign Large Value-FV; Foreign Large Blend-FB; Foreign Large Growth-FG; Foreign Small/Mid Value-FA; Foreign Small/Mid Growth-FR.
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News from Morningstar
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*Society of Professional Administrators and Recordkeepers Forum
Morningstar is pleased to participate in another SPARK FORUM, November 2-4 at the Breakers in Palm Beach. We will be at booth number 4, and hope to see you there. In addition, we are planning a client dinner on Sunday evening to celebrate our acquisition earlier this year of mPower, a leading provider of investment advisory services to large retirement plan sponsors. The dinner will be held right after the SPARK Welcome Reception, at the Flagler Steakhouse. If you would like to join us for dinner, please RSVP to Tiffany Turner at 312.696.6373.
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