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Morningstar's style boxes updated

There are some big changes going on over at Morningstar, the Chicago-based mutual fund research company that taught investors to think about stars---and style boxes--- when looking for funds to invest in. One new change is the methodology used for calculating style boxes (a tool used to choose mutual funds.)

Over the years, Morningstar's style boxes have been used as guide for helping both investors and investment professionals compare funds and aid them in deciding what kind of mutual fund to invest in. This nine-box style grid, introduced in 1992, was and still remains an easy-to-understand visual tool that provides a snapshot of the size of the companies a fund invests and the fund's investment style. In the company size department, the grid included three choices, large-, medium- and small-caps. The three investment style choices are value, growth or blend.

The original style box, however, was designed for categorizing equity funds. For some, because of that simplicity made creating a personal portfolio of mutual funds as easy as playing tick-tack-toe: Using the nine-box grid investors could "X" the style box that related to their last fund investment. Cross out all nine boxes, and viola, you've got a diversified portfolio of mutual funds. But creating a diversified portfolio of mutual funds isn't that simple and style boxes ---whether calculated using yesterday's old methodology or today's new one---aren't full of carved-in-granite data. Markets change, so can a portfolio manager's investment style. As a result, so has the way Morningstar style box data is calculated.

Today's new style box looks --and reads--- the same as the old. However, it's way of determining which box best describes a fund is more sophisticated because it looks at both growth and value characteristics.

According to Russell Kinnel, director of fund analysis at Morningstar, in the past, two factors were used to measure a fund's investment style. Now, there are 10 ---five are valuation measures and five measure growth. "Different measures go in and out of fashion in the market, but by capturing the 10 most important, the style box will more accurately reflect what's driving a fund's performance, " says Kinnel.

There's also been a change in how Morningstar determines market capitalization. Instead of the old method--- it made the 250th largest stocks the large-/mid-cap border and the 1,000th largest stock the small-/mid- border---today's large-cap stock are those that fall among 70 percent of the U.S. market's value; mid-caps those that fall within the next largest 20 percent with all the rest considered small-caps."Targeting a portion of the market's value makes it a little more clearer how much you'd want in each bucket to build a portfolio that matches the market," writes Kinnel in Morningstar's Fund Spy newsletter.

All these changes are good news for fund investors and the professionals helping them to select funds. And, by the way, don't impact how a fund is categorized---that depends upon three years' worth of style boxes. But even today's new style box calculations ought not lull you into thinking it's the only tool to use when evaluating a fund. Things like how long the fund's manager been at the helm, whether the fund invests in the kinds of companies you believe are poised to perform well over the next five-and 10 years, and if it falls within your tolerance for risk taking are questions that need to be answered long before you take a peek at its style box.

For more information about Morninstar's new style box calculations, visit www.Morningstar.com.


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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