Morningstar Advisor - Winter 2008 - 37

Unlock the Box By Christine Benz The Morningstar Style Box should ease your investing decisionmaking, not confine it. The goal of the Morningstar Style Box, which we rolled out in 1992, was to create an easy-to-use system for classifying funds based on what securities a fund actually owns. We map stock funds into one of nine boxes based on the size of the firms in which they invest and their holdings’ style characteristics (value, core, growth). We determine bond funds’ style-box positioning by looking at their credit-quality and interest-rate positioning. Over the past 15 years, the nine-square style box has gained a lot of traction among institutions, advisors, and individual investors, and it has become the industry standard for classifying and categorizing funds. At the same time, however, the style box has come under fire. Critics have asserted that Morningstar believes style-pure funds are better than more-free-ranging offerings, for example. They’ve also argued that Morningstar polices funds based on their style-box placement and will blow the whistle when a fund veers too far from where it has landed in the past. Neither assertion is true. It’s time to clear up some misconceptions. What the Style Box Does Describes How Funds Really Invest describe what funds actually do, not what they say they do. Before the advent of the style box, investors had only prospectus objectives— such as growth and income, equity income, and growth—to help them sort among funds. The trouble with prospectus objectives is that funds with the same objectives can pursue radically different strategies. For example, both Parnassus Equity Income PRBLX and Nicholas Equity Income NSEIX use a prospectus objective of “equity income.” But the former focuses on large companies with both growth and value characteristics and has a whopping yield of more than 4%. The latter, meanwhile, buys budget-priced stocks across the market-cap spectrum and has a yield that’s only slightly higher than an S&P 500 Index fund. Thus, we think it’s more helpful to classify the Parnassus fund as a large-blend offering and the Nicholas fund as mid-cap value than to lump both together in the equity-income bin. Gauges Fund Performance Guards Against Overlap In addition to describing what funds do and helping investors assess performance, Morningstar’s style-box and category system can aid advisors in building a welldiversified portfolio. For example, an investor might think a portfolio composed of a world-stock fund, a domestic large-cap value offering, and a financials sector fund is diversified. But by drilling beneath the service and checking the funds’ style boxes, the investor might find that all three land in the large-value area of the style box and will tend to perform in a similar fashion. Checking a portfolio’s style-box distribution can help investors determine if their portfolio has faux or real diversification. Style Box Reality Checks Drift Is Okay, If Strategy Stays Consistent Morningstar created the style box—and the corresponding category system—as a way to Although indexes are one way to evaluate a mutual fund’s performance, Morningstar’s style-box and category system is arguably an even better way to assess how well a fund is doing its job. That’s because you can’t actually invest in an index, but a fund’s category is composed of its true peers—active and index funds alike—that one can actually invest in. Although the style box helps describe and categorize funds, that doesn’t mean we think managers need to stay in a single area of the style box forever and ever. Funds pursuing consistent strategies can and do change the areas of the style box in which they reside, and our analysts don’t criticize a fund simply because that happens. For example, over the past few years, a number of price-conscious managers, such as Wally MorningstarAdvisor.com 37
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Morningstar Advisor - Winter 2008

Table of Contents for the Digital Edition of Morningstar Advisor - Winter 2008

Morningstar Advisor - Winter 2008
Contents
Letter from the Editor
Inbox
How Do You Use the Morningstar Style Box?
Real Estate Investing Goes Global
The Golden Touch
Investment Briefs
Learning to Fly with Equity Options
Another Block in Building a Portfolio
In a League of Their Own
Unlock the Box
Fashion Change
The View from the Investment Side
Unpredictable Style
Weighting the Fundamentals
Wire-to-Wire Consistency
The Secret's Out
Focus on Financials
Strongest Homebuilders Will Withstand the Wrecking Ball
Breaking Style Conventions
Playing It Safe with Financials
Back to Bond School
Mutual Fund Analyst Picks
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
The Style Counsel
Morningstar Advisor - Winter 2008 - Intro
Morningstar Advisor - Winter 2008 - Morningstar Advisor - Winter 2008
Morningstar Advisor - Winter 2008 - Cover2
Morningstar Advisor - Winter 2008 - 1
Morningstar Advisor - Winter 2008 - 2
Morningstar Advisor - Winter 2008 - Contents
Morningstar Advisor - Winter 2008 - 4
Morningstar Advisor - Winter 2008 - 5
Morningstar Advisor - Winter 2008 - 6
Morningstar Advisor - Winter 2008 - Letter from the Editor
Morningstar Advisor - Winter 2008 - 8
Morningstar Advisor - Winter 2008 - Inbox
Morningstar Advisor - Winter 2008 - How Do You Use the Morningstar Style Box?
Morningstar Advisor - Winter 2008 - 11
Morningstar Advisor - Winter 2008 - Real Estate Investing Goes Global
Morningstar Advisor - Winter 2008 - 13
Morningstar Advisor - Winter 2008 - 14
Morningstar Advisor - Winter 2008 - The Golden Touch
Morningstar Advisor - Winter 2008 - 16
Morningstar Advisor - Winter 2008 - 17
Morningstar Advisor - Winter 2008 - Investment Briefs
Morningstar Advisor - Winter 2008 - 19
Morningstar Advisor - Winter 2008 - 20
Morningstar Advisor - Winter 2008 - 21
Morningstar Advisor - Winter 2008 - Learning to Fly with Equity Options
Morningstar Advisor - Winter 2008 - 23
Morningstar Advisor - Winter 2008 - 24
Morningstar Advisor - Winter 2008 - 25
Morningstar Advisor - Winter 2008 - Another Block in Building a Portfolio
Morningstar Advisor - Winter 2008 - 27
Morningstar Advisor - Winter 2008 - 28
Morningstar Advisor - Winter 2008 - 29
Morningstar Advisor - Winter 2008 - In a League of Their Own
Morningstar Advisor - Winter 2008 - 31
Morningstar Advisor - Winter 2008 - 32
Morningstar Advisor - Winter 2008 - 33
Morningstar Advisor - Winter 2008 - 34
Morningstar Advisor - Winter 2008 - 35
Morningstar Advisor - Winter 2008 - Unlock the Box
Morningstar Advisor - Winter 2008 - 37
Morningstar Advisor - Winter 2008 - 38
Morningstar Advisor - Winter 2008 - 39
Morningstar Advisor - Winter 2008 - Fashion Change
Morningstar Advisor - Winter 2008 - 41
Morningstar Advisor - Winter 2008 - 42
Morningstar Advisor - Winter 2008 - 43
Morningstar Advisor - Winter 2008 - The View from the Investment Side
Morningstar Advisor - Winter 2008 - 45
Morningstar Advisor - Winter 2008 - 46
Morningstar Advisor - Winter 2008 - 47
Morningstar Advisor - Winter 2008 - 48
Morningstar Advisor - Winter 2008 - 49
Morningstar Advisor - Winter 2008 - 50
Morningstar Advisor - Winter 2008 - 51
Morningstar Advisor - Winter 2008 - Unpredictable Style
Morningstar Advisor - Winter 2008 - 53
Morningstar Advisor - Winter 2008 - Weighting the Fundamentals
Morningstar Advisor - Winter 2008 - 55
Morningstar Advisor - Winter 2008 - 56
Morningstar Advisor - Winter 2008 - 57
Morningstar Advisor - Winter 2008 - 58
Morningstar Advisor - Winter 2008 - 59
Morningstar Advisor - Winter 2008 - 60
Morningstar Advisor - Winter 2008 - 61
Morningstar Advisor - Winter 2008 - Wire-to-Wire Consistency
Morningstar Advisor - Winter 2008 - 63
Morningstar Advisor - Winter 2008 - 64
Morningstar Advisor - Winter 2008 - 65
Morningstar Advisor - Winter 2008 - The Secret's Out
Morningstar Advisor - Winter 2008 - 67
Morningstar Advisor - Winter 2008 - 68
Morningstar Advisor - Winter 2008 - 69
Morningstar Advisor - Winter 2008 - Focus on Financials
Morningstar Advisor - Winter 2008 - 71
Morningstar Advisor - Winter 2008 - 72
Morningstar Advisor - Winter 2008 - 73
Morningstar Advisor - Winter 2008 - Strongest Homebuilders Will Withstand the Wrecking Ball
Morningstar Advisor - Winter 2008 - 75
Morningstar Advisor - Winter 2008 - Breaking Style Conventions
Morningstar Advisor - Winter 2008 - 77
Morningstar Advisor - Winter 2008 - Playing It Safe with Financials
Morningstar Advisor - Winter 2008 - 79
Morningstar Advisor - Winter 2008 - 80
Morningstar Advisor - Winter 2008 - Back to Bond School
Morningstar Advisor - Winter 2008 - 82
Morningstar Advisor - Winter 2008 - Mutual Fund Analyst Picks
Morningstar Advisor - Winter 2008 - 84
Morningstar Advisor - Winter 2008 - 85
Morningstar Advisor - Winter 2008 - 86
Morningstar Advisor - Winter 2008 - 87
Morningstar Advisor - Winter 2008 - Undervalued Stocks
Morningstar Advisor - Winter 2008 - 89
Morningstar Advisor - Winter 2008 - 90
Morningstar Advisor - Winter 2008 - 91
Morningstar Advisor - Winter 2008 - Most Popular Variable Annuities
Morningstar Advisor - Winter 2008 - 93
Morningstar Advisor - Winter 2008 - New at Morningstar
Morningstar Advisor - Winter 2008 - 95
Morningstar Advisor - Winter 2008 - The Style Counsel
Morningstar Advisor - Winter 2008 - Cover3
Morningstar Advisor - Winter 2008 - Cover4
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