Why are the expense ratios reported in Morningstar products different from those in other sources?
The most common reason is that Morningstar takes expense ratios from latest audited annual reports only.
The reason for this is expense ratios from audited annual reports are audited and annualized. The other sources
may provide data from the prospectus or semiannual reports. These ratios are estimates, while annual report numbers
are actual expense ratios.
The annual expense ratio expresses the percentage of assets deducted each fiscal year for fund expenses,
including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs
incurred by the fund. Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales
charges are not included in the expense ratio.
Why does Morningstar return information for the S&P 500 not always match the index returns published elsewhere?
At Morningstar we assume reinvestment of dividends on the last day of the month for both mutual funds and
indexes. This provides an apples-to-apples comparison between a fund’s total returns and the S&P 500
total returns of the S&P 500. Other sources do not assume reinvestment of dividends when calculating returns for the index.
A note about the Standard & Poor’s 500 Index:
The S&P 500 is a market-capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market.
It measures the movement of the largest issues. Standard & Poor’s chooses the 500 companies
that comprise the index based on market size, liquidity, and industry group representation. Included are the stocks of industrial,
financial, utility, and transportation companies. For more information, visit the Standard & Poor’s
Why might Morningstar’s total returns be different from those I get from other sources?
At times the total returns that we calculate for a mutual fund may differ from a total return calculated by another
data provider or from one supplied by the fund itself. Some possible reasons for this include:
Time period differences : often the difference is due simply to time-period discrepancies. For example, a
fund that issues its annual report in late 2004 for its fiscal year ended September 30 may list a 2004 return based on
the period from October 1, 2003 to September 30, 2004. Because we calculate annual total returns for all funds on a calendar
basis, to allow valid comparisons between funds, the 2004 return we list for a fund won’t match its fiscal-year-end
calculation. Similarly, some newspapers and financial magazines may choose slightly different dates or may publish
preliminary data in order to fit their publication schedules.
Calculation differences: Morningstar calculates total returns by reinvesting all distributions at the NAV (price per share)
on the reinvestment date used by the fund. We then compound the funds monthly returns and annualize the figure for time
periods greater than one year. Other firms may employ different methodology. For example, some services reinvest all
dividends at month-end prices. Morningstar takes the extra step to obtain the actual reinvestment price that an investor
in the fund would receive for reinvesting distributions into additional shares. When reinvestment prices are not
available, we assume reinvestment at the market price on, or as close as possible to, the dividend-payment date.
Why did my fund lose a star?
Pure math. A fund’s Morningstar Rating is based solely on a formula that Morningstar recalculates each month--there
is no subjective input. The loss of a star doesn’t mean someone at Morningstar has downgraded the fund--it
simply means the fund’s relative performance is currently below the cutoff point for its previous rating.
Nothing more, nothing less.
Time to panic? Nope. You didn’t buy the fund just because of its star rating (we hope), and you
shouldn’t sell solely because of its rating, either. There are several reasons for changes in a fund’s
rating that have little to do with its management and absolute performance:
- A fund may lose one or more stars when it reaches its fifth or 10th birthday because Morningstar calculates
the overall star rating by combining the star ratings for three years, five years, and 10 years. For example: if the
fund has poor performance in its fourth & fifth years, when the fund reaches its fifth birthday fifth year performance
becomes part of the rating, and the overall rating of the fund might decrease. Conversely, for some funds, the
rating will improve when it turns five years old.
- A fund may lose a star if it is very close to the rating breakpoint and its peers in the category generally
outperformed it in the recent past. In this case the loss of a star simply means the fund's relative performance is
currently below the cutoff point for its previous rating.
- The number of funds in the category will fluctuate and can have an effect on a fund’s star rating.
New funds are activated each month and removed from publication. This could be beneficial or detrimental to a
fund’s rating since the rating is determined relative to a fund’s peers.
Why isn’t my fund in the New York Times?
- Morningstar provides daily pricing information for the New York Times, AP, and for other newspaper mutual
fund tables. The requirements for being printed in the New York Times are currently active share classes with
more than $150 million in net assets for the daily paper and $30 million for the weekend paper.
- The fields that are printed in the New York Times are daily NAV, daily share change %, YTD return, and
footnotes on expenses, splits, and distributions.
Morningstar only receives total net assets at month end, so it is possible for a fund to reach $150
million in the middle of the month but that fund would not show up in the paper until the end of the month
when we receive the new total net assets.
Why doesn’t my fund’s style box match the fund’s category?
These two indicators of investment style will sometimes differ because they examine different time periods.
The style box is based on the most recent portfolio provided to Morningstar. The Morningstar category is based
on an average of three and five years of portfolio data(12 quarterly portfolios or 36 monthly portfolios if available).
A discrepancy between a fund's category and its style box indicates a change from a previous investment style that may or
may not be temporary. For example, if a manager has favored small-cap stocks over time but is now currently leaning toward
mid-cap stocks, the fund may be listed in the small-cap growth category while its style box will be mid-cap growth. This could
also occur if a manager’s small-cap holdings have grown to be mid sized companies.
When making historical performance comparisons, use the Morningstar category. To determine the most current investment
style of a fund, use the Morningstar Style Box. If a fund’s style continues to show a trend towards another
Morningstar category, our editorial analysts may elect to move it to that category.
How does Morningstar assign categories?
- Twice a year a quantitative program is run for the entire universe of funds in the Morningstar database
to determine which funds need to change categories. This program is based strictly on portfolio statistics. Morningstar’s
editorial team reviews the funds that the program indicates should change and then approves or rejects the changes. The category
reviews are performed for all the open-end funds twice a year in May and November. For funds that are less than 12 months old,
the category is reviewed quarterly. During the biannual category reviews, if a fund’s category is changed, notification
of that change will be sent to the fund family. The fund’s management can appeal the category change by contacting the
editorial analyst. If the fund is a new fund in our system and we don’t have a history of portfolio holdings, the category
will be assigned using the investment policy section in the fund's prospectus.
- Some factors that can result in category changes include:
- A fund merged with another fund.
- A new manager takes over the fund, and this results in an investment policy / style change.
- A fund changes names, and the name change reflects a shift in the fund's strategy.
In cases where we move a fund to a different category, we will assign less weight to historical performance for the longer
time periods when calculating the star rating.
What is the difference between the Morningstar category and the prospectus objective?
In an effort to distinguish funds by what they own, as well as by their prospectus objectives and styles, Morningstar
developed the Morningstar categories. While the prospectus objective identifies a fund’s investment goals based on
the wording in the fund prospectus, the Morningstar category identifies funds based on their actual investment styles as
measured by their underlying portfolio holdings (portfolio statistics and compositions over the past three years). If
the fund is new and has no portfolio, we estimate where it will fall before assigning a more permanent category. When
necessary, we may change a category assignment based on current information.
What do I need to do to get a fund into Morningstar’s products?
- Morningstar requires several pieces of information from the fund company or its transfer agents before we can
activate a fund in our database. A fund must be designated as "active" to be included in Principia Pro
and our other products.
- To become an active fund in Morningstar’s database the fund must have all the following:
- Complete performance history for the fund from its inception date. This includes all daily net asset values, dividends,
and capital gains (broken out between long-term and short-term gains).
- A commitment to provide on an ongoing basis
- A daily file containing the closing NAVs and all distributions.
- A monthly file containing month-end NAVs, dividends, capital gains, reinvestment dates, and total net assets.
- Verified Returns: All of the returns for the fund must be verified before fund can be activated in the database.
- An initial portfolio so that we can place the fund in the appropriate category.
- Fees, expenses, and purchase information such as loads (front-end, deferred), expense projections, expenses
(12b-1, management, advisor, administrative, subadvisor), and min/max investment amounts contained in the
prospectus, statement of additional information and annual reports.
What is the Morningstar Rating for mutual funds (a.k.a. the star rating)?
The Morningstar Rating for mutual funds, commonly called the "star rating," brings both performance and risk together
into one evaluation. Morningstar adjusts for risk by calculating a risk penalty for each fund based on "expected utility
theory," a commonly used method of economic analysis. Although the math is complex, the basic concept is relatively
straightforward. It assumes that investors are more concerned about a possible poor outcome than an unexpectedly good outcome
and that those investors are willing to give up a small portion of an investment’s expected return in exchange for greater
certainty. A "risk penalty" is subtracted from each fund’s total return, based on the variation in its
month-to-month return during the rating period, with an emphasis on downward variation. The greater the variation, the larger
the penalty. If two funds have the exact same return, the one with more variation in its return is given the larger risk penalty.
How does Morningstar calculate its star ratings?
Funds are ranked within their categories according to their risk-adjusted return (after accounting for all sales charges and
expenses), and stars are assigned such that the distribution reflects a classic bell-shaped curve with the largest section in
the center. The 10% of funds in each category with the highest risk-adjusted return receive five stars, the next 22.5% receive
four stars, the middle 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star.
Funds are rated for up to three periods--the trailing three, five, and 10 years and ratings are recalculated each month.
Funds with less than three years of performance history are not rated. For funds with only three years of performance history,
their three-year star ratings will be the same as their overall star ratings. For funds with five-year records, their overall
rating will be calculated based on a 60% weighting for the five-year rating and 40% for the three-year rating. For funds with
more than a decade of performance, the overall rating will be weighted as 50% for the 10-year rating, 30% for the five-year
rating, and 20% for the three-year rating. The star ratings are recalculated monthly.
For multiple-share-class funds, each share class is rated separately and counted as a fraction of a fund within this scale,
which may cause slight variations in the distribution percentages. This accounting prevents a single portfolio in a smaller
category from dominating any portion of the rating scale.
If a fund changes Morningstar Categories, its historical performance for the longer time periods is given less weight,
based on the magnitude of the change. (For example, a change from a small-cap category to large-cap category is
considered more significant than a change from mid-cap to large-cap.) Doing so ensures the fairest comparisons and
minimizes any incentive for fund companies to change a fund’s style in an attempt to receive a better rating by
shifting to another Morningstar Category.
Morningstar Risk describes the variation in a fund’s month-to-month return, with an emphasis on downward variation.
But unlike standard deviation, which treats upside and downside variability equally, Morningstar Risk places greater
emphasis on downward variation. Like beta, Morningstar Risk is a relative measure. It compares the risk of funds in each
Within each category, we rank each fund’s risk penalty--the difference between raw and risk-adjusted
returns--from highest to lowest. Intuitively, a fund with greater variation in month-to-month return would be
assessed a larger penalty than a fund with lesser variation. The level of risk is assigned based on the ranking
for funds in the category: The top 10% of funds are High risk, the next 22.5% are Above Average risk, the middle
35% are Average risk, the next 22.5% are Below Average risk, and the bottom 10% are Low risk.
When using Morningstar Risk, remember that it is relative. You can’t compare Morningstar Risk of funds
from different categories, as you can their standard deviations. For example, an intermediate-term bond fund with
High Morningstar risk may be more volatile than other intermediate-term bond funds, but it could be--and, due to
the nature of stock funds, probably is--less risky than a small-cap value fund with Below-Average Morningstar Risk.
Morningstar Return is an assessment of a fund’s excess return over a risk-free rate (the return of the
90-day Treasury bill) in comparison to similar funds, after adjusting for all applicable loads and sales charges.
We adjust returns for maximum front-end loads, applicable deferred loads, and applicable redemption fees. In each
Morningstar Category, the top 10% of funds earn a High Morningstar Return, the next 22.5% Above Average, the middle
35% Average, the next 22.5% Below Average, and the bottom 10% Low. Morningstar Return is measured for up to three time
periods (three, five, and 10 years). These separate measures are then weighted and averaged to produce an overall
measure for the fund. Funds with less than three years of performance history are not rated.
What was the old methodology for computing the Morningstar Rating for mutual funds?
Significant changes were made to the rating methodology, effective June 30, 2002. Previously, funds were rated within
one of four broad asset-class-based groups--U.S.-stock funds, international-stock funds, taxable-bond funds, and
municipal-bond funds. The new methodology rates funds within much smaller comparison groups, their respective
The biggest impact of this change is that funds are less likely to receive a high (or low) rating due to a
market "tailwind." For example, under the previous methodology, persistent outperformance by the value
investment style resulted in high ratings for most value funds, while growth-oriented funds were likely to
receive lower ratings. However, the change also means that some extremely risky funds will now receive five
stars (those with the best risk-adjusted return within their category), which was difficult under the old methodology.
In addition, a new method is now used for risk adjustment. In the previous methodology, risk was defined by measuring
the fund’s average underperformance relative to a guaranteed investment, the 90-day Treasury bill. If a
fund’s return exceeded this benchmark each month, the fund was deemed riskless. Yet funds with highly
variable returns are likely to eventually produce losses, even if they’re currently enjoying a run of
success. Internet funds are a perfect example. Because they outperformed the Treasury bill for many successive
months, they exhibited little downward risk in 1999; but they suffered huge losses in subsequent years.
The current methodology accounts for all variations in a fund’s monthly performance, with an emphasis
on downward variation. It rewards consistent performance and reduces the possibility of strong short-term
performance masking the inherent risk of a fund.
Why doesn’t my fund have a Morningstar Rating?
A fund must be at least three years old to have a Morningstar Rating.
What is the Morningstar Rating for stocks?
The Morningstar Rating for stocks takes a business-centered approach. The rating compares a stock’s
current price with our estimate of the stock’s fair value. We base this estimate on the present value
of the company’s future cash flows. For more detailed information on the rating,
How is the Morningstar Rating for stocks created?
Morningstar analysts estimate a company’s future financial performance using a detailed discounted
cash-flow model that factors in five-year projections for the company’s income statement, balance
sheet, and cash-flow statement. The result is an analyst-driven estimate of the stock’s fair value.
For more detailed information on the rating, click here.
What does the Morningstar style box represent?
The style box is a tool that represents the characteristics of a security in a graphical format. For stocks
and stock funds, there are two pieces of data that determine where the security falls within the style box. One
is market capitalization: how large or small a company is. Large companies show up in the top row of the style
box, middle-sized companies show up in the middle row, and small companies show up in the bottom row.
The other factor that determines a security’s placement in the style box is its investment style.
Investment style is based on a growth score and a value score. Half of a stock’s growth score is based
on its long-term projected earnings growth relative to other stocks in its market-cap range. The remainder
of the growth score is based on a combination of historical earnings growth, sales growth, cash-flow growth,
and book-value growth relative to the stocks in its market-cap range. The resulting score will range from 0
to 100. Half of a stock’s value score is based on its price/projected earnings relative to other
stocks in its market-cap range. The remainder of the value score is based on a combination of price-to-book,
price-to-sales, price-to-cash flow, and dividend yield relative to the stocks in its market-cap range. This
score will also range from 0 to 100.
Morningstar arrives at a stock’s investment style by subtracting its value score from its growth
score. A stock with a strongly negative score is assigned to value, and one with a strongly positive score
is assigned to growth. Those in between land in the core column of the style box (for funds, this is known
as the blend column). The breakpoints can vary over time but, on average, each style will account for one
third of the stocks in each market-cap range.
A stock mutual fund’s style-box position is based upon all of the stocks in its portfolio. The
portfolio’s market cap is based on the geometric mean of the portfolio. That calculation takes the
market cap of each stock and its weighting in the portfolio into account to come up with a number that
best represents how the fund is positioned. The portfolio’s overall stock style is based on the
weighted average of the style scores for all of its stocks (the weighting is based on the percentage of
the portfolio each stock takes up). Funds with averages on the low side land in the value column, those
on the high side land in growth, and those in between are blend.