Dear Morningstar Clients,
This e-mail contains Morningstar Data Release Notes for October 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
*Quarterly Fund Category Review
*Hedge Fund Informational Website Launched
*Extended Performance Methodology Change
*Price Ratio Methodology Change
*Risk & Market Cap Measures
RECAP OF PREVIOUS ANNOUNCEMENTS
*New Minimums for Portfolio Statistics
*Fiduciary Grades for Funds
*Morningstar Acquires ePiper Separate Accounts Data
NEWS FROM MORNINGSTAR
*Morningstar at SPARK
*Data Questions
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Morningstar Data Release Notes � October 2004
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*Quarterly Fund Category Review
The next quarterly Category Review will begin on Nov. 12, with the appeal period running from Nov. 12 until Nov. 18. Complete details and instructions will be sent via email on Nov. 12, and the new categories will be effective with November month-end processing. New categories and the resulting Morningstar Rating(TM) can be seen on our Websites on Dec. 3. This review will include all funds, using portfolio data through Sept. 30.
*Hedge Fund Informational Website Launched
Please visit http://corporate.morningstar.com/hedgefunds to learn about Morningstar's new hedge fund database, and how the information we collect will help investors and advisors make better decisions about investing in hedge funds. On the site, you�ll find a spreadsheet that can be downloaded to get your hedge funds listed in our database. We hope you�ll take a few minutes to browse through these pages, and we invite you to forward this URL to individuals involved in the hedge fund industry. If you have questions about topics not covered on this Web site, please send an email to ryan.tagal@morningstar.com. We�re interested in your comments, feedback, and suggestions as we build one of the highest quality and most complete hedge fund databases in the industry.
*Extended Performance Methodology Change
Effective November 30, 2004, Morningstar will change the method for determining which share class is used as the �parent� for Extended Performance calculations. The share class with the oldest inception date is designated the parent. However, in cases where a portfolio has more than one share class with that inception date, rather than using net assets to determine the parent, we will now choose the parent share class based on the following sequence of share classes: A, B, C, Inst, D, Adv, Inv, Retirement, S, T, M, N, Other, No Load.
This change in methodology will not impact the format of the data. Data feed files including this information will not have structural changes that would require a testing period.
In addition, Morningstar is currently reviewing our Extended Performance methodology. We may make changes to our approach after a comprehensive study of regulatory guidance, current industry practices, investor needs, and related internal processes (in the U.S. and abroad). We will keep you informed.
*Price Ratio Methodology Change
As noted last month, here are additional details on the upcoming methodology change. Effective Dec. 31, 2004, Morningstar will make some slight revisions to the methodology for portfolio-level price ratios (P/E, P/B, P/S, P/C and dividend yield). These changes should provide a more accurate and complete picture of each portfolio�s holdings. Please see the methodology and FAQ documents below for more detail. This is a methodology change only and will not affect the format or structure of client files.
Morningstar will apply the new methodology to all portfolios dated on or after 12/31/2004. There will be a transition period when some funds have older portfolios (old methodology) while other funds have new portfolios (new methodology). We will not recalculate historical portfolios with the new methodology.
Please click here for the methodology document and FAQ:
http://datalab.morningstar.com/ClientComm/Morningstar_Price_Ratios.pdf
http://datalab.morningstar.com/ClientComm/Morningstar_Price_Ratios_FAQ.pdf
*Risk & Market Cap Measures
Effective January 31, 2005, Morningstar will make some minor changes to the methods we use to calculate standard deviation, Sharpe Ratio, Modern Portfolio Theory (MPT) statistics, and average market cap. Please note that this is a methodology change only and will not affect the format or structure of client files. You will receive more information about these changes in next month's Release Notes.
Standard Deviation: Use the sample method (divide by n-1) instead of the population method (divide by n). Annualize the monthly standard deviation by multiplying it by the square root of 12.
Sharpe Ratio: Use the (sample) standard deviation of returns in the denominator, rather than the standard deviation of excess returns.
MPT Statistics: Use the sample method for covariance and standard deviation. Annualize alpha with an arithmetic method (multiply by 12) rather than a geometric method.
Average Market Cap: Use a simple arithmetic weighted average of the market caps of the underlying stocks, rather than a geometric average.
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Recap of Previous Announcements
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*New Minimums for Equity Portfolio Statistics
Effective Dec. 31, Morningstar will implement a new data quality rule that will prohibit an equity Style Box and market cap information from being generated unless we are able to score at least 50% of a portfolio's equity holdings. This change affects all portfolios with at least 15% equity holdings, the minimum required to generate an equity Style Box. The portfolio statistics that will not be calculated are: Equity Style Box, x & y data points for size and style, Style Box breakdown, market cap (GAC), and market cap breakdown. Our analysis has determined that this change will affect fewer than 20 portfolios, and we will notify those fund families individually in the coming weeks. Please contact your account team if you have any questions.
*New Fiduciary Grade for Funds
On Aug. 24, Morningstar introduced a new measure to help investors assess the intangible traits of a fund -- including regulatory issues, the quality of a fund board, management incentives, fees, and the firm's corporate culture. This new measure, called the Fiduciary Grade for funds, is currently available on Morningstar.com for Premium Members, and will be included in the Morningstar Mutual Funds binder in October. Reprints of the analysts� reports are available. We plan to roll out the Fiduciary Grades into other Morningstar products and will keep you informed.
*Morningstar Acquires ePiper Separate Accounts Data
Morningstar has acquired Pensions & Investments� ePiper separate account database, creating one of the most comprehensive separate accounts databases in the industry. Our database now covers nearly 5,000 separate accounts and more than 1,000 managers, with quantitative information such as performance, complete portfolio holdings, asset allocation, sector weightings, the Morningstar Style Box(TM), and the Morningstar Ownership Zone(SM). This data is now available in DataLab(R) and Licensed Data(SM) feeds, and also in Advisor Workstation(SM) and Principia.
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News from Morningstar
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*Morningstar at Industry Shows
We hope to see you at the Society of Professional Administrators and Record Keepers (SPARK) Conference at The Breakers in Palm Beach, Florida, Nov. 7-9.
*Data Questions
Contact your account team or our data quality department:
Phone: 312-696-6600
Fax: 312-696-6019
E-mail: dataquestions@morningstar.com
Mailing address: Data Questions
Morningstar, Inc.
225 West Wacker Drive
Chicago, Illinois 60606
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