Tracking Funds as They Migrate Across the Style Box

The Morningstar Style Box has a lot of stories to tell.

We can shade in the section of the style box where a fund's current portfolio has most of its holdings. We can also draw an amoebalike Morningstar Ownership Zone that encompasses most of the portfolio and typically sprawls across two or three of the sections. This nicely illustrates the true stretch of a fund and the fact that very few funds stick to just one of the nine boxes. Or we can plot a centroid for a fund's portfolio and then track where it moves (snail-trail style) across the style box. This tells you the story of where a fund has moved over time.

It's this centroid movement that we'll look at here. Funds with big centroid movements often have undergone a strategy shift. Other times, it's simply a manager moving in the direction of what he or she thinks are better opportunities. Finally, it can even be that the market itself moves and the fund hasn't changed holdings. Remember, these are all relative measures, so if a fund favors health-care stocks and health-care stocks rally to higher valuations, then the fund would likely move farther to the right of the style box even without making any trades.

I'll take a look at the funds whose centroids have moved the greatest distance across the style box. It's useful information because these changes might lead your overall portfolio to tilt one way or the other. In addition, it's helpful to understand what your portfolio managers are doing. First, a quick rundown on how we calculate the style box.

Style Box Basics
The style box grid aims to capture market capitalization on the vertical y-axis and value/growth characteristics on the horizontal x-axis.

To plot market cap, we calculate a mean-weighted market capitalization for each portfolio. The lines for small-, mid-, and large-cap funds float with the market as it goes up and down. We put the top 70% of a market's value in large caps, the next 20% in mid-caps, and the final 10% in small caps.

For value and growth, we look at five valuation characteristics and five growth characteristics. The characteristics were chosen based on market behavior and fund manager investment criteria. Each is converted into a relative score so that it can be combined into one x-score for each portfolio. Here's how it shakes out.

To build a value score, we give a 50% weighting to price/projected earnings. We give 12.5% weightings to these historical-based measures: price/book, price/sales, price/cash flow, and dividend yield.