How Does the Morningstar Style Box Work?
The Morningstar Style Box is a nine-square grid that shows a graphical representation of the investment style of stocks, mutual funds and fixed-income securities
1. Style Box for Individual Stocks & Equity Mutual Funds
The vertical axis constitutes market capitalization (large, mid and small), while the horizontal axis classifies style (value and growth).
The one difference between the grids for stocks and for funds is that the horizontal axis for stocks includes “core” between “value” and “growth” (see Graph A below). The “core” segment constitutes stocks for which neither value nor growth characteristics dominate. On the other hand, the horizontal axis for funds includes “blend” (see Graph B below), which means a mix of value and growth stocks, or mostly core stocks.
Horizontal Axis – Value & Growth Weights
To determine the “scores” for value and growth factors, a number of metrics are weighted according to the following breakdown:
Vertical Axis – Market Cap
Value and growth characteristics for each individual stock are compared against those of other stocks within the same capitalization band. This results in a “Value Score” and a “Growth Score” anywhere between 0 and 100.
To determine the overall style score, the Value Score is subtracted from the Growth Score. The resulting number can range from 100 (low yield, high growth) to -100 (high yield, low growth). If the result is strongly negative, the stock’s style is value; if the result is strongly positive, the stock is classified as growth. If the Value Score and Growth Score are not substantially different, the stock is classified as “core.”
For a fund, which is an aggregation of individual stocks, its style is determined by the styles of the stocks it owns. This can be done by plotting all of a fund’s constituent stocks on the grid. An asset-weighted average of the style and size scores of the underlying equities results in the fund’s placement in the style box.
The large-cap category comprises stocks that account for the top 70% of the capitalization of each geographic area (e.g. domestic stock universe). Mid-cap stocks represent the next 20%, and small caps represent the balance.
2. Style Box for Fixed Income
The style box for fixed-income securities is based on interest-rate sensitivity and credit quality. The horizontal axis represents limited, moderate and extensive sensitivity to rates, as measured by the bond’s effective duration. The vertical axis illustrates high, medium and low credit quality, based on a third-party rating.
Horizontal Axis – Interest-Rate Sensitivity
- Limited: A bond fund’s three-year average effective duration needs to be below 75% the three-year average effective duration of the Morningstar Core Bond Index (MCBI).
- Moderate: The bond fund’s three-year average effective duration needs to be between 75% and 125% of the three-year average effective duration of the MCBI.
- Extensive: The bond fund’s three-year average effective duration needs to be above 125% of the three-year average effective duration of the MCBI.
Vertical Axis – Credit Quality
- “Low” credit quality is defined as an asset-weighted average credit rating less than “BBB-.”
- “Medium” credit quality is defined as an asset-weighted average credit rating less than “AA-“ but greater or equal to “BBB-.”
- “High” credit quality is defined as an asset-weighted average credit rating of “AA-“ or higher.