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Morningstar to Change Style Box Methodology


Chicago fund researcher Morningstar said last week that it will change its widely used formula for evaluating mutual funds. The changes, which will apply to its "style box" system, are slated to go into effect by mid-year.

Morningstar's style box, which evaluates whether a fund falls into value, growth or blend categories, is divided into nine squares that provide investors with a quick synopsis for how managers run an individual fund. The boxes' vertical axis notes small-, mid- and large-cap styles and the horizontal axis notes value, blend and growth funds.

The company said that, although the appearance of the box won't change, the new methodology aims to offer a "more precise portrayal of a stock's style characteristics - one that is more in line with the way portfolio managers look at stocks."

The original methodology evaluated the stocks in which funds invest based on two factors: price-to-earnings and price-to-book ratios. The new method uses 10 factors to decide a stock's style. Value stocks will be evaluated based on price-to-book, price-to-sales, price-to-cash flow, and dividend yield, the company said. Growth stocks, meanwhile, will be evaluated using long-term projected earnings growth, historical earnings growth, sales growth, cash flow growth and book value growth.

As a result, Morningstar said it will change the style classifications for a "modest number" of funds. For example, Morningstar will change the style designation of the Janus, Janus 20 and Janus Olympus funds from large growth to large blend. And the Putnam Small Value classification will change from small blend to small value.