Understanding the mutual fund style box

The style box is a graphical representation of the characteristics of a mutual fund. Morningstar, Inc., a financial services research provider, promotes the tool by juxtaposing it with the well-known mutual fund rating system, which rates mutual funds between 1 and 5 stars. Therefore, many mutual fund investors are already familiar with the style box and its use as a tool for evaluating mutual funds.

At the same time, the style box is a tool with several other practical applications. Read on to learn how to use style boxes to classify mutual funds and individual securities, and to help you understand money management and portfolio asset allocation strategies.

A glance at the box

The domestic stock style box is designed to assist in the evaluation of securities and is the most famous and popular type of this tool. Morningstar’s domestic stock style box, as shown in the figure below, provides a simple stock classification system.

The vertical axis is divided into three categories based on market value. For mutual fund evaluation, Morningstar’s proprietary market value evaluation method is used to rank the underlying stocks of each mutual fund to determine the fund’s market value. Among the 5,000 stocks in Morningstar’s domestic stock database, the top 70% are classified as large-cap stocks. The next 20% are classified as mid-cap stocks, and the remaining stocks are classified as small-cap stocks.

The horizontal axis is also divided into three categories based on valuation. Review the underlying stocks in each mutual fund portfolio again. Price-to-earnings (P/E) and price-to-book (P/B) ratios are used as the basis for mathematical calculations to classify each stock as growth, hybrid, or value. The term hybrid is used to describe stocks that exhibit growth and value characteristics.

How to use the style box

The vertical and horizontal axes together can be used to classify mutual funds into one of nine categories:

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  • Great value
  • Big mix
  • Big growth
  • Middle value
  • Medium mix
  • Medium growth
  • Small value
  • Small mix
  • Small growth

This classification system can be used to determine how an investment fits a particular investment portfolio from the perspective of asset allocation. Some investors use it to find funds for each category, while others focus on specific areas. For example, aggressive investors may focus primarily on small-cap funds or growth funds. Nevertheless, the position of the fund in the style box is not only useful for choosing investments. In the long run, it is also very useful, you can use historical style box data to verify the consistency of portfolio holdings.

The same style of boxes used to evaluate mutual funds can also be used to evaluate individual stocks and bonds; after all, these boxes have been used to evaluate each underlying security in a given fund before averaging the data to provide a fund-level rating. Many investors are not familiar with this usage of the style box; due to Morningstar’s famous mutual fund rating system, many other fund companies place style boxes next to the star rating system for marketing purposes, which makes other uses of the tool sad. Pale.

In addition to domestic stock-style boxes, Morningstar also offers two other types: international stock-style boxes and fixed-income-style boxes.

International stock style box

This style of box looks exactly like its domestic cousin, with the market value on the vertical axis and the valuation on the horizontal axis. Although they look similar, they use different specifications to determine market value and valuation. In the international stock style box, the market value is based on the median market value of a particular fund asset, and each asset is measured and included in the overall. Valuation uses price-to-cash flow ratios rather than price-to-earnings ratios, which can be said to make comparisons between securities easier, as earnings data may vary from country to country.

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Fixed income box

In addition to the stock style box, there is also a fixed income investment style box. Like the stock type box, the fixed income type box can be used to classify investments into one of nine categories. It measures credit quality on the vertical axis and ranks investment as high, medium or low. The horizontal axis measures interest rate sensitivity, which is measured by the duration (maturity) of the bonds in the portfolio. The duration categories include short-term, medium-term, and long-term. Each target bond in the fund’s portfolio has a different credit quality rate and a fixed maturity date, so classification is easy.

Beyond Morningstar

Although Morningstar has received most of the praise on the style frame, most of the major North American mutual fund companies and personal financial services companies have adopted the style frame and customized it according to their own practices. For example, in the fair style box, the axis will usually change the mix to include core, medium to medium. Proprietary classification methods can also be developed to determine market value, but most methods operate within reasonable parameters based on industry standards.

Beyond mutual funds

In addition to developing proprietary style frames, research providers and securities analysts have gone beyond using this tool to evaluate mutual funds and personal securities, and instead use it to evaluate and classify money managers. Research analysts use style boxes to develop hypothetical portfolios that incorporate various fund managers. In this way, high-net-worth investors can be shown how to create a diversified investment portfolio by using personal fund managers. Historical data can be used to run an almost endless variety of scenarios, giving analysts, financial advisors, and investors the opportunity to consider the performance results and style consistency that will be produced by combining various fund managers in a specific arrangement and asset allocation percentage. The same type of analysis can also be performed on individual securities.

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In addition to investment choices, the style box also plays a role in monitoring whether money managers are true to their self-proclaimed style. For example, a core manager who shows a tendency to buy value stocks will be marked as a “core with a value propensity.” If the manager suddenly starts to favor growth stocks, investors will want to note this change in style and consider when the addition of growth stocks conflicts with the required asset allocation model or when the portfolio is moved in an unsuitable direction Choose new managers to meet their long-term investment goals. Because the individual accounts are sold through professional financial advisors, your advisor can easily provide the style box information you want to see.

Bottom line

Whether you use the style box to review mutual funds, personal securities or fund managers, it is a simple and very useful tool that will continue to play a role in investment evaluation. It can also help you determine the overall asset allocation of your portfolio by determining where your assets are in the box. Even if you have never used a style box yourself, you can bet that the investment industry will continue to rely on this time-tested tool to promote its products and guide investors to make decisions.


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