Morningstar’s New World-Stock Categories

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. In late April, Morningstar made some changes to the way it categorizes world-stock funds. Joining me today to discuss those changes is Russ Kinnel. Russ is Morningstar’s director of manager research and editor of Morningstar FundInvestor.

Hey, Russ. Thanks for being here today.

Russ Kinnel: Glad to be here.

Dziubinski: Let's start by unpacking what the changes are and why Morningstar made them.

Kinnel: That's right. We are splitting the world large-stock category into three categories by style. So, world large-value, world large-blend, world large-growth. Obviously, what we've done with U.S. equity and what we've done with foreign equity, now we are doing it with world stock.

Dziubinski: Why right now? Why is now the time to do this with world stock? As you mentioned, we have been doing it for foreign-stock funds and domestic-stock funds for quite a while.

Kinnel: It's nothing dramatic, but I think we are seeing more funds that are specifically dedicated to either the value or the growth side. And then, of course, the last couple of years we've had really extreme performance by value and growth. And so, it sort of magnifies the problem of having them all in together where you kind of make every growth fund look like a champ and every value fund look like a dud when growth does really well.

Dziubinski: Will these category changes have any impact on the Analyst Ratings that we assign to the world-stock funds in general?

Kinnel: Probably not very much because we already were thinking about them in terms of their own style. We tend to be kind of agnostic and think over the next five to 10 years. We don’t know if value or growth is going to outperform. So, I don’t expect it to have a big impact now.

Dziubinski: Let's take a look category by category at some of the funds whose longer-term returns now look pretty good relative to their peers now that they are in a new category that better fits their style. Maybe let's start with the world large-growth stock category.

Kinnel: Sure. So, growth has been the dominant place, even after this nice little value rebound. World large-growth funds are returning about 17% annualized over the trailing 10 years versus 7% for value. So, growth was the place to be. T. Rowe Price Global Stock, American Funds New Economy, Artisan Global Opportunities are among the very highest returners in world stock.

Dziubinski: Russ, what about some of the standout long-term-returning funds in the world large-value category now?

Kinnel: The impact was really dramatic here. So, funds like Oakmark Global and Artisan Global Value have leapt to the top of their peer group from looking maybe above average versus the old peer group but now they really look like world-beaters against both peers and benchmark. And then just below them it's kind of dramatic to see Dodge & Cox Global and Franklin Mutual Beacon, which their five- and 10-year returns were a little bit below average before and now they're top-quartile. So, it really shows how dramatic that change is from splitting the categories up, and it really highlights funds like Oakmark Global as well as Dodge & Cox Global where we think they are really good funds and now the returns kind of bear that out a little more.

Dziubinski: And lastly, how about that group that sort of ends up in the blend category?

Kinnel: American Funds Capital World Growth and Income is a fund that goes from, say, average to a little above average. But the real star is MFS Global Equity, which goes from top third to top 10%. We rate that one Gold. And now I think the new categories really highlight that it's a good fund that really does a good job of making the best use of MFS' depth globally, and you can really see that now.

Dziubinski: Well, Russ, thank you so much for your time today. It sounds like these refinements are really going to be useful for investors evaluating world-stock funds. We appreciate your time.

Kinnel: You're welcome.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.