4What are Morningstar's indexes and ticker symbols?
Based on the same methodology as the Morningstar Style Box�, Morningstar has developed a comprehensive family of 16 indexes targeting 97% of the U.S. equity market. The Morningstar indexes include a broad market index, three cap indexes, three composite style indexes, and nine style indexes.
Broad Market Index
Morningstar US MarketSM Index $MSTAR
Cap Indexes
Morningstar Large CapSM Index $MLCP
Morningstar Mid CapSM Index $MMCP
Morningstar Small CapSM Index $MSCP
Composite Style Indexes
Morningstar US GrowthSM Index $MGRO
Morningstar US CoreSM Index $MCOR
Morningstar US ValueSM Index $MVAL
Style Indexes
Morningstar Large GrowthSM Index $MLGR
Morningstar Mid GrowthSM Index $MMGR
Morningstar Small GrowthSM Index $MSGR
Morningstar Large CoreSM Index $MLCR
Morningstar Mid CoreSM Index $MMCR
Morningstar Small CoreSM Index $MSCR
Morningstar Large ValueSM Index $MLVL
Morningstar Mid ValueSM Index $MMVL
Morningstar Small ValueSM Index $MSVL
4What is the purpose of these indexes?
Portfolio Building Blocks
Asset allocation: Morningstar's indexes enable a thorough assessment of style-related risk-return tradeoffs in portfolio construction, as well as precise control and monitoring of portfolio style.
Investment vehicles: Morningstar indexes were designed to support investment creation from the beginning. Comprising the best practices in index construction�broad market representation, investability, and controlled turnover�the indexes are a sound basis for index funds, exchange traded funds and derivative products.
Performance Measures
Performance evaluation: Performance measurement and attribution based on the indexes provide a powerful means of understanding the factors that affect portfolio return and risk on an ongoing basis.
Market monitoring: The behavior of stocks of different styles can be monitored on an up-to-the-minute basis using Morningstar's style-based indexes. Understanding the behavior of different stock types is a crucial input to decision-making when selecting individual funds for investment or in constructing a diversified, style-controlled portfolio.
4What is unique about Morningstar's indexes?
In addition to the robust 10-factor methodology, Morningstar's indexes are unique in several ways:
Distinct
Diversification depends upon the ability to make clear investment distinctions. For the purposes of asset allocation and portfolio assembly, Morningstar's style box methodology was designed to uniquely classify stocks by style and capitalization. To enable investors to create non-overlapping and comprehensive portfolios, our methodology maps each stock to only one of the 9 style boxes.
Many index families use an overlapping index approach where two indexes contain the same stock. Other families choose to split the market cap of a single stock between growth and value indexes if their style is not clear. To Morningstar, this blurring of distinctions makes asset allocation more difficult.
Style Pure
Morningstar holds the view that not all stocks are growth or value. When neither growth or value characteristics predominate, a stock is classified as core. Although a few index families recognize that core or neutral stocks exist, these families exclude them in their style indexes. Morningstar's family is unique in that it offers the ability to target investment in companies that generally represent the mainstream and are often "blue chip" holdings. Also, because we divide the style universe into core, in addition to growth and value, the characteristics of the Morningstar style indexes are more pure than other style index families. This affords investors greater possibilities for diversification in asset allocation.
Designed for Investability
From the beginning, Morningstar's indexes have incorporated the best practices in index construction. Designed to support portfolio assembly, they are completely rules-based, free-float weighted, fully investable, buffered to limit unnecessary turnover, and calculated in real-time with end-of-day values available in four currencies.
4What were the methodology design objectives?
To create robust asset allocation and measurement tools, Morningstar's research team designed the indexes to satisfy the following objectives:
Broadly represent the market without sacrificing investability
Consistently measure stocks' value and growth orientation in line with market practitioners and stock analysts
Maximize performance distinctions between growth and value�higher negative correlations between growth and value stocks
Classify each stock uniquely (i.e., each stock belongs to only one of the nine style indexes)
Minimize turnover
Utilize current best practices in index maintenance and construction methods (such as free-float weighting)
4How were the style methodology factors chosen?
We chose the fundamental balance sheet and market factors that would best measure and describe the separate "value" and "growth" characteristics of common equities. To reflect the fact that fund managers look at both historical and projected measures of company characteristics, Morningstar assigned a 50% weighting to the forward-looking estimates. The 10-factor model's results were evaluated using different factor weightings to satisfy the index design criteria: a high negative correlation between the composite value and growth scores, accurate classifications, and good classification stability. The selected weightings produced superior results.
4Is the methodology subjectively determined?
Morningstar's indexes are governed by transparent, objective rules for security selection, exclusion, rebalancing, and adjustments for corporate actions. Morningstar makes no subjective determinations related to index composition.
4What are the index eligibility requirements?
To be eligible for Morningstar's indexes, a stock must:
be listed on the NYSE, the AMEX, or Nasdaq
be domiciled in the U.S. or its primary stock market activities are carried out in the U.S.
have sufficient historical fundamental data available to classify its investment style
be in the top 75% of companies in the investable universe based on its liquidity score
Stocks are excluded if they:
have more than 10 non-trading days in the prior quarter
are American Depository Receipts and American Depository Shares, fixed-dividend shares, convertible notes, warrants, rights, tracking stocks, limited partnerships and holding companies
4How does Morningstar determine its cap cut-offs?
Morningstar uses a dynamic percentage-based approach to divide its U.S. Market Index into three cap indexes. By defining each as a percentage of the market cap of the investable universe, the definitions remain stable regardless of market movements.
Large Cap: Largest 70% of investable market cap
Mid Cap: Next 20% of investable market cap (70th to 90th percentile)
Small Cap: Next 7% of investable market cap (90th to 97th percentile)
4How does Morningstar assign stocks to the indexes?
Within each capitalization class, index constituents are assigned to one of three style orientations�value, growth or core�based on the stock's overall value-growth score. A stock's value orientation and growth orientation are measured separately using related but different variables.
Value Factors
Price/projected earnings (50.0%)
Price/book (12.5%)
Price/sales (12.5%)
Price/cash flow (12.5%)
Dividend yield (12.5%)
Growth Factors
Long-term projected earnings growth (50.0%)
Historical earnings growth (12.5%)
Sales growth (12.5%)
Cash flow growth (12.5%)
Book value growth (12.5%)
4How frequently do you rebalance the indexes?
Morningstar rebalances constituent shares and weights of its indexes quarterly in March, June, September, and December (on the Monday following the 3rd Friday). Immediate rebalancing occurs if two constituents merge or a company's free-float changes by 10% or more. The indexes are reconstituted twice annually in June and December.
4What data sources are used in the Morningstar indexes?
Security Prices: SIAC and Nasdaq data feed
Corporate Actions: IDC, Dow Jones Newswire, and primary exchange and press announcements
Fundamental Data: five years of restated financial data are sourced from Mergent, Inc. Earnings estimates are provided by IBES. Morningstar normalizes the data and generates the price ratios and growth rates. Morningstar uses restated financials data for calculating fundamental factors.
Float: proxy statements, 13-F, 10-K, and registration statements
4Why does Morningstar use free-float?
Full market capitalization represents the overall economic importance of a company. However, if corporate insiders hold a large portion of shares outstanding, then an investor seeking a proportional equity exposure may end up pursuing shares of the company that may not be available. For example, Wal-Mart has less than 60% of its shares available to the public for investing. If the full weight of the company is used in the index, the demand for Wal-Mart shares could outstrip the supply, causing price distortions. Therefore, using the free float instead of the full capitalization improves the investability of the index.
4What are some examples of free-float adjustment?
As of June 26, 2002, the following examples of block ownership would require float adjustment:
Microsoft's Bill Gates privately owned more than 12% of the company's outstanding shares
Fiat had a 5.6% ownership in General Motors, which is a case of cross ownership and would require an adjustment to GM's shares to reflect true investability.
State Street Bank and Trust Co had a 9.3% stake in Morgan Stanley Dean Witter. Although State Street is an investment firm, this particular holding is a trust for a company-sponsored, equity-based compensation program (employee benefit plans). Morningstar's rules state that both employee benefit plans and trusts are considered block ownership.