Dear Morningstar Clients,
This e-mail contains Morningstar Data Release Notes for March 2004. 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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IN THIS ISSUE
*Enhancements to International Style Box
*Fund Category Review
*Extended Performance in Principia and DataLab
*SEC Rule 482
*Best Fit Index List
RECAP OF PREVIOUS ANNOUNCEMENTS
*Changes to Investment Profile Page
*Two New Fixed-Income Categories
*Portfolio Holdings and Newly Activated Funds
*529 College Savings Plans- Peer Group Methodology Changes
NEWS FROM MORNINGSTAR
*Morningstar at Industry Shows
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Morningstar(R) Data Release Notes - March 2004
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*Enhancements to International Style Box
As announced last month, 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. 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 model uses a regional framework and employs five factors for value and five factors for growth. Stocks are scored for size within one of seven investment regions: United States, Latin America, Canada, Europe, Japan, Asia ex-Japan, and Australia/New Zealand. The stocks in each region are further subdivided into large-, mid-, or small-cap groups for value-growth scoring. Portfolios are classified based the weighted average of the underlying stock scores. Please click here for the methodology paper for more details. This paper is also available on the DataLab home page, on the Research tab.
http://datalab.morningstar.com/Clientcomm/Style_Box_Methodology_2004.pdf
The new methodology will affect all managed products (open-end, closed-end, variable annuity, separate accounts, etc).
* For March 31, Morningstar will calculate new Style Box assignments for all international equity funds.
* Morningstar will use the new methodology to recalculate Style Boxes for three years of historical portfolios for use the May category review.
* Morningstar will not rerun historical data for domestic equity funds; however, if a domestic equity fund owns some international stocks (this is more common for specialty funds), the international stocks will be incorporated into the fund's Style Box assignment for all portfolios dated March 31, 2004 or later.
*Fund Category Review
The next quarterly Category Review is scheduled for mid-May. This review will include all funds and will use three years of portfolio data through March 31, 2004. Funds that are now in the five, foreign style-based categories (Foreign Large Value, Foreign Large Blend, etc.) will be classified based on the new 10-factor Style Box methodology (see Style Box methodology paper for more details about category assignments). Complete details and instructions for the category review will be sent via e-mail in May, and new categories will be effective with May month-end processing.
*Extended Performance Data in Principia(R) and DataLab(R)
Effective with the April release of Principia, Morningstar will display Extended Performance statistics in italics, and the Morningstar Extended Performance Rating(TM) will be displayed as hollowed-out stars. These data will be included on the Investment Detail(TM) report. We will also include additional data points derived from Extended Performance in Principia's Research View and Reports, including annual returns, quarterly returns, risk statistics and MPT statistics.
The Extended Performance Rating will be available in DataLab with the 3.0 release, planned for this summer. Additional Extended Performance statistics, including MPT statistics, will be incorporated at a later date.
Methodology Note: Extended Performance statistics are calculated for eligible share classes based on the oldest surviving share class of the fund with at least three years of performance history. Returns are adjusted for any difference in fee structure to calculate the Morningstar Extended Performance Rating.
Please contact your account team if you have any questions.
*SEC Rule 482
The recent amendment to SEC Rule 482, which requires fund companies to make month end performance available by the seventh business day of the month, goes into effect on April 1, 2004. Contact your account team to learn about how Morningstar is working with clients to help them comply with the new requirements.
*Best Fit Index List
Please click here for an updated copy of our best fit index list:
http://datalab.morningstar.com/ClientComm/Best_Fit_Index_List_Mar_04.pdf
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Recap of Previous Announcements
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*Changes to Investment Profile page
To support our clients� compliance with the recent changes to SEC 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.
*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.
*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 limited number of funds without portfolio holdings will be activated in the Morningstar databases. 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.
*529 College Savings Plan-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 college savings 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 Plan data, please contact your account team.
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News from Morningstar
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*Morningstar at Industry Shows
Look for Morningstar at the Money Management Institute Annual Convention, April 20-21, at the Westin Copley Place in Boston, MA and the Investment Management Consultants Association, April 25-28, at the Boca Raton Resort and Club in Boca Raton, FL.
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