Fixed-Income Style Boxes are listed for both domestic and international fixed-income funds, with the exception of convertible bond funds.
The model is based on the two pillars of fixed-income performance: interest-rate sensitivity and credit quality. The three duration groups are short, intermediate, and long-term, and the three credit quality groups are high, medium, and low quality. These groupings display a portfolio's effective duration and credit quality to provide an overall representation of the fund's risk, given the length and quality of bonds in its portfolio. As with equity funds, nine possible combinations exist, ranging from short duration/high quality for the safest funds to long duration/low quality for the riskiest.
The horizontal axis focuses on interest-rate sensitivity, as measured by the bond's portfolio duration or average maturity. If duration is not available, the horizontal axis is based on the portfolio's average effective maturity for taxable-bond funds and nominal maturity for municipal-bond funds.
Taxable-bond funds with durations of 3.5 years or less are short-term; more than 3.5 years and less than six years, intermediate term; and more than six years, long term. (Funds with an average effective maturity of four years or less qualify as short-term; more than four years and up to 10 years, intermediate; and more than 10 years, long-term.)
Municipal bond funds with durations of 4.5 years or less qualify as short-term; more than 4.5 years and less than seven years, intermediate term; and more than seven years, long term. When nominal maturity is used for municipal-bond funds, the following ranges are used: less than five years, short-term; more than five years and less than 12 years, intermediate; and more than 12 years, long term.
The vertical access focuses on average credit quality, as derived from fund company surveys. Fund companies send the credit quality breakdown, which is translated into average credit quality using a simple formula.
Funds that have an average credit rating of AAA and AA are categorized as high quality, less than AA but greater than or equal to BBB are medium quality, and below BBB are categorized as low quality. For the purposes of Morningstar's calculations, U.S. government securities are considered AAA bonds, non-rated municipal bonds are classified as BB, and all other non-rated bonds are labeled B.
It is important to note that fixed-income style data is useful for evaluating only the bond portions of a fund's portfolio. Thus, funds with a significant mix of stocks, bonds, and cash may have a substantial portion of their portfolios left out of the fixed-income style data. Consequently, they will be given both equity and fixed-income style data.
The style box for fixed-income funds offers a different interpretation on the way a fund company chooses to position a fund, such as by its name or marketing material. Style data relies upon the fund's actual holdings, and therefore often proves to be a more accurate assessment of a fund's investment approach.