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Morningstar's New Categories

Morningstar Dishes Up New Fund Categories

Morningstar, the Chicago-based securities research firm, is trying to make things easier for anyone looking for mutual fund research. How so, you ask? In June, it will be making some changes in how funds are classified ---and, as a result, create 11 new fund categories and eliminating one.

One of the first places new and existing investors often turn for mutual fund information are the one page reports that Morningstar publishes. In each, you can learn everything from who manages the fund, to what its expenses are, past performance, the fund's star rating and much much more.

But, just as investment times have changed and new types of funds have been created, the pros at Morningstar have found a better way to classify the funds they track. In June, their fund category classifications will number 58.

"For the vast majority of funds, this isn't going to have much of an impact," says Russel Kinnel, director of fund analysis at Morningstar. "But for the areas that are, it will be helpful in a number of ways."

For instance, while the bulk of the changes are in the municipal bond arena, one of the many things that Kinnel said that the new classifications will enable investors to do is to make better comparisons between funds.

"The better the peer group, the better job you can do of judging a fund," says Kinnel. " So, we wanted to pull out some funds that really are behaving differently or have different asset classes from the ones that they were previously categorized in."

Additionally, t

he new changes have created new categories of funds where non existed before.Here's a run down of what the 11 new fund categories are:

- Domestic-Hybrid. This is the name of the one category that's been eliminated---but not wiped out entirely. What's happened is, the category has been split in two: conservative allocation and moderate allocation domestic-hybrid funds. The conservative allocation grouping will be comprised of funds that have 20 percent to 50 percent of their assets invested in equities and 50 percent or more in fixed income. And, any funds with more than 50 percent of their assets invested into equities will fall under the moderate allocation heading.

- Single-State Municipal Bonds. Six new state-specific municipal bond categories have been created. They are: Florida, Pennsylvania, Massachusetts, New Jersey, Ohio and Minnesota.

- Municipal High-Yield. High-yielding muni bond funds have grown in popularity over the years and this grouping will include any fund that invests a majority of its assets in BBB rated bonds or lower.

- Bank-Loan Funds. Like high-yielding municipal bond funds, bank -loan funds have also been growing in popularity and as such, now warrant a category of their own.

- Bear-Market Funds. Thanks to an extended bear market, bear market funds have caught the attention of many investors. In this grouping you'll find under 20 funds. But, Morningstar thought a category specific to it was necessary "because funds that use short-selling techniques serve a different purpose than those that are covered by our current categories."

(For more information about Morningstar's new fund categories, visit www.morningstar.com)

Having new fund categories to peruse is one thing, but understanding how to use them to build a portfolio, is another. Kinnel, however, says that job isn't as daunting it might first appear. "There are lots of types of funds out there and the thing you need to do is to start off with a plan and understand what core funds you need. Then, start building up that core and go from there."

To begin, he recommends that core fund holdings include a large-cap US fund, a large-cap foreign fund, high-quality intermediate taxable and intermediate municipal bond funds and a short-term fixed-income fund.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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