Dear Morningstar Clients,
As noted last month, in response to your feedback on our Client Survey, you will notice some format changes to Data Release Notes. You will find a "contents" section at the beginning of the newsletter to help you scan for topics of interest to you. In addition, we will include links to supporting documents instead of including those documents as attachments. We hope these enhancements will make Data Release Notes easier for you to read.
Thank you very much for your suggestions. Your input is always welcome, and helps us to improve our communications, products and services. Please contact any member of your account team. Thank you.
Your Morningstar Team
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IN THIS ISSUE
*Changes to Investment Profile page
*Fund Category Review
*MSCI Index Name Change
*Portfolio Holdings and Newly Activated Funds *Two New Fixed-Income Categories *Enhancements to International Style Box *Corporate Governance Grade
RECAP OF PREVIOUS ANNOUNCEMENTS
*Data Collection Automation
*529 Peer Group Methodology Changes
*New Sector Breakdown for Bond Funds
*Share Class Consolidation
NEWS FROM MORNINGSTAR
*2003 Morningstar Market Commentary
*DataLab Style Analysis Capabilities Enhanced *Rule 482 Data Package *Morningstar at Industry Shows
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Morningstar(R) Data Release Notes � February 2004
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*Changes to Investment Profile page
To support our clients� compliance with the recent changes to rule 482 regarding supplemental sales literature, we have developed a new Investment Profile template to accommodate the required disclosure. We are also developing procedures to support the inclusion of toll free numbers and web site addresses for investors to obtain performance data current to the most recent month. If your firm is subject to these requirements and you would like to see a sample of the new template, please contact your account team.
*Fund Category Review
The quarterly category review began on Feb. 13, with the appeal period running from Feb. 16 through Feb. 20. This review includes only funds with one year of history or less. Complete details and instructions were sent via e-mail on Feb. 12, and new category assignments will be effective with February month-end processing.
*MSCI Index Name Changes
Effective Jan. 31, 2004, MSCI has removed the word "free" from some of their indexes. The change is already reflected in Morningstar products. Please click here for a complete list of effected indexes.
http://datalab.morningstar.com/ClientComm/IndexNameChanges.pdf
*Portfolio Holdings and Newly Activated Funds In order to activate funds as close as possible to the inception date, we have changed our procedures so that a very limited number of funds will be activated in the Morningstar databases without portfolio holdings. This could occur when a new fund enters the database early in the month and we are anticipating receipt of month-end data. During the period we are awaiting the data, the fund will be displayed without holdings or portfolio statistics. You may see a slight increase in funds without holdings in your Licensed Data Feeds and in DataLab.
*Two New Fixed-Income Categories
Morningstar will be adding two new categories, Muni Single State Short (SS) and Stable Value (VL), on May 31, 2004. We will also rename one category: Muni Single State Int/Sh (SI) will become Muni Single State Interm (SI).
Muni Single State Short (SS)
Currently, both short-duration and intermediate-duration single state municipal-bond funds are combined together in the category Muni Single State Int/Sh. Morningstar is creating the new short category (and changing the existing category to "�Interm") so that short- and intermediate-duration funds can be in different peer groups. Duration measures a fund�s interest rate sensitivity and often drives fund performance, so these two types of funds often have different risk and return characteristics. The category placement will not change for muni single state short funds that invest in CA, FL, MA, MN, NJ, NY, OH, PA, because those funds are placed in state-specific categories.
Stable Value (VL)
Morningstar will also create a new category, Stable Value (VL). Stable value funds seek to provide income while preventing price fluctuations. The most common stable value funds invest in a diversified portfolio of bonds and enter into wrapper agreements with financial companies to guarantee against fluctuations in their share prices. These wrapper agreements typically provide price stability on a day-to-day basis, thereby insulating each fund's net asset value from interest-rate volatility. Therefore, their true overall durations are effectively zero. As such, Morningstar currently places most stable value funds in the Ultrashort Bond category. Funds that offer principal protection but do not guarantee a stable price will not be included in the Stable Value category.
*Enhancements to International Style Box Morningstar will make several enhancements to our proprietary international Style Box(TM) on March 31, 2004. The new methodology is consistent with the 10-factor Style Box for U.S. stocks that was introduced in May 2002. The new 10-factor international model will better capture the style characteristics of individual stocks, and it lays the groundwork for investors, advisors, and portfolio managers to build better global portfolios.
The current international Style Box methodology uses just two factors (price-to-book and price-to-cash flow). The new model uses five factors for value and five factors for growth. Separate value and growth style scores will be calculated for each stock, based on both historical and forward-looking measures. Securities are classified as value or growth based upon the dominant score. Portfolios are classified based the weighted average of the underlying stock scores.
While the appearance of the Style Box remains the same, investors can look forward to more accurate and more stable fund classifications under the new model. The new methodology will affect international equity portfolios. In addition, if a domestic equity portfolio owns any international stocks (this is common for specialty funds), we will now consider those international stocks as part of the fund's overall style assignment.
Detailed communication about this methodology will be included in the March issue of Data Release Notes.
*Corporate Governance Grade
To help investors better judge the "shareholder friendliness" of the people and companies behind the funds in which they invest, Morningstar fund analysts will introduce a new measure of corporate governance. This new measure will focus on five areas: regulatory issues, independence of boards, manager compensation, fees, and overall corporate culture. These individual measures will be combined to arrive at a final grade. These grades will be introduced in the coming months at the individual fund level, and later rolled up to assign scores at the fund family level. We will provide more information as we approach the implementation date. In the meantime, please contact your account team if you have any questions. Or click here to read a recent article outlining our process from Morningstar�s FundInvestor newsletter.
http://datalab.morningstar.com/ClientComm/FundInvestorCorpGovern.pdf
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Recap of Previous Announcements
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*Data Collection Automation
As you may be aware, Morningstar collects a number of data points directly from the N-SAR (Semi-Annual Report of Registered Investment Companies) filings. These data points include registrant, advisor, sub-advisor, transfer agent, fund level expenses and fund level expense ratios, among others. We encourage you to submit these data on a timely basis so your information is properly reflected in Morningstar products. Please see a member of your account team if you have any questions.
*529 Peer Group Methodology Changes
Effective April 15, 2004, the asset allocation breakpoints for the five "static" peer groups will change. The "static" peer groups are used to benchmark portfolios whose asset allocation remains constant for the entire term of the investment, in contrast with aged-based portfolios whose asset mix changes over time. Peer groups are used to create portfolio statistics and sector weightings, along with performance comparisons. The new breakpoints will be set as follows:
1. 100% Equity: >97% equities (previously >80% equities) 2. Aggressive: 80-97% equities (previously 60-80% equities) 3. Moderate: 50-80% equities (previously 40-60% equities) 4. Conservative: 3-50% equities (previously 20-40% equities) 5. 100% Bond: less than 3% equities (previously 0-20% equities)
This change better reflects the actual asset allocation within 529 plans, and permits a more even distribution of portfolios within the peer groups. If you have any questions, or would like to learn more about Morningstar�s 529 data, please contact your account team.
*Bond Sectors
On Feb. 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 TIPS
3 US Agency
4 Mtg Pass-thru
5 Mortgage CMO
6 Mortgage ARM
7 US Corporate
8 Asset-backed
9 Convertible
10 Municipal
11 Inflation-Protected
12 Foreign Corp
13 Foreign Govt
14 Cash
Some Morningstar products will present this data at the super sector level as follows:
US Govt = sectors 1-3
Mortgage = sectors 4-6
Credit = sectors 7-11
Foreign = sectors 12-13
Cash = sector 14
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 following Morningstar 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.
*Share Class Consolidation
Effective Feb. 29, 2004, we will be consolidating share classes into the 14 categories listed below. We will continue to reflect the registered name of the share class, 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."
The new "share class type" data point is available now in DataLab.
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News from Morningstar
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*2003 Morningstar Market Commentary
After the losses of the three previous years, 2003�s decisive market rebound helped make up for at least some of the pain investors endured. Almost across the board, 2003 was one of the best-performing markets in recent memory. Every one of Morningstar�s nine style indexes, which track U.S. stocks based on their investment style and size characteristics, finished the year with sizeable gains. http://indexes.morningstar.com/Index/PDF/MorningstarMarketCommentary123103.pdf
*DataLab(R) Style Analysis Capabilities Enhanced Morningstar has significantly expanded the style analysis capabilities in DataLab, adding functionality to our holdings-based tools and adding returns-based style analysis capabilities. Please ask your account team for more information, and click here for a fact sheet summarizing Morningstar�s research on holdings-based and returns-based style analysis models.
http://datalab.morningstar.com/ClientComm/StyleAnalysisFactSheet_0204.pdf
*Rule 482 Data License
Morningstar is now offering a data license to support your compliance with recent changes to the SEC�s Rule 482 requiring that month-end performance be available by the seventh business day. This package includes month-end performance data and applicable purchase fees and will be delivered by the fourth business day following each month-end. Please contact your account team for more details.
*Morningstar at Industry Shows
We hope to see you in booth 103 at the American Society of Pension Actuaries 401(k) Sales Summit, Feb. 22-24, at the World Center Marriott in Orlando, Fl. And look for Morningstar at the Money Management Institute Annual Convention, April 20-21, at the Westin Copley Place in Boston, MA.
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