Morningstar - Q2 2023 - 24

Dispatches
TRENDS
Introducing the Role in Portfolio Framework
Morningstar's new Role in Portfolio framework
provides practical guidance on using funds
in a portfolio. It focuses on two key dimensions-
a minimum holding period and a maximum
position size-assigned to each holdings-based
Morningstar Category. We reviewed a wide variety
of historical risk/return and portfolio data to
sort each category into one of four classifications:
Main/Stand-Alone These broadly diversified funds
would be suitable as the main or sole holding
in a portfolio, consuming 80% to 100% of assets.
Core These funds are broadly diversified across a
major asset class and are suitable for an allocation
as large as 40% to 80%.
Building Block These funds focus on midsize
areas of the market, such as large-growth and
large-value funds that can be used as components
of diversified portfolios, with 15% to 40% an
appropriate weighting.
Limited These funds focus on more specialized
areas of the market or areas that are difficult
to use in a portfolio and should be limited to no
more than 15% of assets.
The grid shows where some of the largest
Morningstar categories land. A few squares don't
include any categories. In the one- to two-year
range, investment types such as bank savings
accounts or Treasury bills are more suitable. There
are no core funds in the six- to 10-year square, as
this role typically applies to plain-vanilla stocks,
which have a longer minimum time horizon, and
short- and intermediate-term bonds, which
are suitable for a time horizon of two to six years.
The grid also offers some insight into the
relative risk levels and diversification of different
Morningstar categories. A disproportionate
number of fund categories land in the bottom right
square. In other words, a large percentage
of fund offerings available have limited utility for
investors trying to build diversified portfolios.
Amy C. Arnott, CFA, is a portfolio strategist at Morningstar
Research Services LLC.
Role in Portfolio Mapping for Select Morningstar Categories
More Diversification/Lower Risk
LOWER
1-2 Years
None
2-6 Years
Allocation-15% to to 30% Equity
Allocation-30% to 50% Equity
Target-Date (2000-2025)
Target-Date Retirement
Ultrashort Bond
Muni National Short
Money Market
Intermediate Core Bond
Intermediate Core-Plus Bond
Intermediate Government
Muni National Intermediate
Short Government
Short-Term Bond
None
Global Bond-USD Hedged
Most Muni Single State
Multisector Bond
RISK
6-10 Years
Allocation-50% to 70% Equity
Global Allocation
Target-Date 2030
None
>10 Years
Allocation-70% to 85% Equity
Allocation-85%+ Equity
Target-Date (2035-2065+)
Foreign Large Blend
Global Large-Stock Blend
Large Blend
Less Diversification/Higher Risk
HIGHER
Corporate Bond
Global Bond
Inflation-Protected Bond
Long-Term Bond
Muni CA, NY, and National Long
Tactical Allocation
None
Equity Market Neutral
Event Driven
Macro Trading
Multistrategy
Nontraditional Bond
Relative Value Arbitrage
Systematic Trend
Source: Morningstar. Data as of Feb. 28, 2023.
Bank Loan
Convertibles
High Yield Bond
Long-Short Equity
Muni Single State Long
Preferred Stock
Foreign Large Growth
Foreign Large Value
Foreign Small/Mid Blend
Large Growth
Large Value
Long Government
Mid-Cap Blend
Regional-Stock
Commodities
Derivative Income
Diversified Emerging Markets
Emerging Markets Bond
Leveraged Net Long
Mid-Cap Growth and Value
Sector and Country-Specific
Small Blend, Growth, and Value
24
LESS
DIVERSIFICATION
Limited
Building Block
Core
MORE
Stand-Alone
https://www.morningstar.com/authors/2350/amy-c-arnott
Morningstar - Q2 2023

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