The Morningstar U.S. Equity Style BoxTM is a grid that provides a graphical representation of the investment style of stocks and portfolios. It classifies securities according to market capitalization (the vertical axis) and 10 growth and value factors (the horizontal axis) and allows us to provide analysis on a 5-by-5 Style Box - as well as providing the traditional style box assignment, which is the basis for the Morningstar Category. Two of the style categories, value and growth, are common to both stocks and portfolios. However, for stocks, the central column of the style box represents the core style (those stocks for which neither value or growth characteristics dominate); for portfolios, it represents the blend style (a mixture of growth and value stocks or mostly core stocks). Furthermore, the core style for stocks is wider than the blend style for portfolios.
Style Box assignments begin at the individual stock level. Morningstar determines the investment style of each individual stock in its database. The style attributes of individual stocks are then used to determine the style classification of stock portfolios.
The scores for a stock's value and growth characteristics determine its horizontal placement. There are 5 value factors and 5 growth factors. Growth and value characteristics for each individual stock are compared to those of other stocks within the same capitalization band and are scored from zero to 100 for both value and growth. To determine the overall value-growth score, the value score is subtracted from the growth score and then rescaled. The resulting score ranges from -100 (high-yield, low-growth stocks) to 400 (for low-yield, extremely growth-oriented stocks). A stock is classified as growth if the value-growth score equals or exceeds the growth threshold. It is deemed value if its score equals or falls below the value threshold. And if the score lies between the two thresholds, the stock is classified as core. The thresholds between value, core, and growth stocks vary to some degree over time, as the distribution of stock styles changes in the market. However, on average, the three stock styles each account for approximately one-third of the total free float in each size category.
Rather than a fixed number of large cap or small cap stocks, Morningstar uses a flexible system that isn't adversely affected by overall movements in the market. The Morningstar stock universe represents approximately 99% of the U.S. market for actively traded stocks. Giant-cap stocks are defined as the group that accounts for the top 40% of the capitalization of the Morningstar domestic stock universe; large-cap stocks represent the next 30%; mid-cap stocks represent the next 20%; small-cap stocks represent the next 7%; and micro-cap stocks represent the remaining 3%. Each stock is given a Size Score that ranges from -100 (very micro) to 400 (very giant). When classifying stocks to a Style Box, giant is included in large and micro is included in small.
A stock portfolio is an aggregation of individual stocks. Its placement is determined by the style and size scores of the stocks it owns. By plotting all of a portfolio's stocks on the Style Box grid, the range of stock styles included in the portfolio immediately becomes apparent.
A portfolio's size score (y or vertical placement) is determined by calculating the asset-weighted size score of the stocks' size scores. Likewise, a portfolio's value-growth score (x or horizontal placement) is determined by calculating the asset-weighted value-growth score of the stocks' value-growth scores. The plot of the resulting value-growth and size score on the Style Box grid is called the centroid. The centroid determines the traditional Style Box and can be plotted in conjunction with (or without) the portfolio's stock holdings' plots.
The Ownership Zone is the shaded area on a Style Box that appears in several tools and reports throughout Direct. It is intended to be a visual measure of a portfolio's style scope - i.e., the primary area of ownership.
Here are a few key points about it:
defaulted to encompass 75% of the stock holdings in a given portfolio, which can be adjusted
centered around the centroid using an asset-weighted calculation
shaded area is fitted - sized as small as possible