Skip to Content
The Short Answer

Why Is My Fund's Style Box Different from Its Category?

These popular fund measures don't always move in tandem.

One issue that's a common source of confusion is the difference between the Morningstar Style Box and Morningstar categories. If you look at Columbia Value and Restructuring , for example, you can see that its quote page shows that it currently occupies the large-blend section of the style box, yet we have it in the large-value category. Why the discrepancy? Why don't we move the fund to the large-blend category, if that's where the style box says it belongs?

Those are good questions, and they go to the heart of the different goals of the style box and the fund categories. Essentially, the style box is meant to be a snapshot of a fund's portfolio at a specific moment in time, while a fund's category is intended to be a stable peer group with which it can be compared over the long term. The two will usually correspond, at least when we're dealing with the nine style box categories such as large value and large blend. But they can sometimes get out of sync temporarily, and that's especially true in an extremely volatile market like we've seen over the past year.

Style Boxes and Categories: The Nitty-Gritty
To understand how such discrepancies happen and what they mean, it helps to understand the mechanics of the style box. For stocks and stock funds, which are our main focus here, the vertical axis of the style box represents size, from large caps at the top to small caps at the bottom, while the horizontal axis represents a continuum from value (on the left) to growth (on the right). Each stock gets a size score based on its market capitalization and a style score based on a combination of five valuation measures and five growth measures. (For more on how these scores are calculated, see the style box fact sheet.) These two scores can be used to plot where each stock lands in the style box.  Google (GOOG), for example, lands in the large-growth square, while  Pfizer (PFE) lands in the large-value square.

Combining the asset-weighted scores for all the stocks in a fund's portfolio allows us to come up with size and value scores for the portfolio as a whole. The point where those asset-weighted scores intersect is called the fund's centroid, and the fund is assigned to whichever of the nine style-box squares its centroid lands in. To see the location of any fund's centroid, go to the fund's Quote page on Morningstar.com and scroll down to the Style Map section, which shows the style box and centroid for its most recent portfolio. Surrounding the red dot representing the centroid is a shaded "ownership zone" encompassing 75% of the fund's asset-weighted holdings, which shows how wide-ranging the fund's holdings are in style-box terms. You can also find a fund's centroid and ownership zone on its Portfolio page, which you can reach by clicking on Portfolio in the navigation bar at the top; the Portfolio page also shows historical style boxes from the past three years. (For more on centroids and ownership zones, see this previous column.)

Fund categories differ from style-box classifications in some fundamental ways. A fund's style box and centroid represent only one portfolio at one moment in time; as the portfolio changes, with stocks going in and out and rising and falling in price, the fund's centroid can move around and possibly drift into other areas of the style box. In theory, it would be possible for a fund to jump to a different square of the style box with each new portfolio. Fund categories are much more stable, designed to avoid such noise by putting each fund into a peer group that best represents what its portfolio has looked like over the long term and is likely to look like in the future. For diversified domestic-stock funds, these categories correspond to the nine style-box groupings, but foreign-stock and specialty stock funds have their own categories that don't correspond to the style box, at least not directly.

Dealing with Mismatches
That brings us back to our original question, namely what happens when a fund's category and its style box get out of sync. The answer is that it depends. If it's just a temporary fluctuation and there hasn't been an explicit change in the fund's strategy, then nothing happens. Consider our original example of Columbia Value & Restructuring, which is in the large-value category but currently lands in the large-blend part of the style box. Although the fund's centroid indicates that its current portfolio is solidly in the large-blend box, its manager and strategy haven't changed. Our latest Analyst Report indicates that we still like the fund a lot, and it remains an Analyst Pick.

However, if a style-box shift looks like it's here to stay, we'll consider moving a fund to a new category. There are no hard-and-fast rules, but generally if a fund's style box has consistently differed from its category for three years or more, we'll consider moving it to a new category that's more in sync with its portfolio. Twice a year, in May and November, we review funds exhibiting such mismatches and decide whether they should change categories; while the data help us identify candidates, all category changes have to be approved by an analyst, and fund companies can appeal category changes if they think a fund should stay put. We'll sometimes also move a fund to a new category if its prospectus changes to reflect a major explicit shift in strategy, regardless of whether that strategy is reflected in the portfolio yet.

The dramatic market conditions of the past couple of years have resulted in an unusual number of style-box/category mismatches, at least in the short term. In late 2008, for example, many funds began tilting toward the growth side of the style box, as a lot of growth stocks had become cheap enough that they were being bought by value and blend managers who would normally find them too expensive. Columbia Value & Restructuring, for example, holds quite a few stocks that Morningstar classifies as large-growth, including top-five holdings  America Movil (AMX) and  Union Pacific (UNP).

If you notice such a style-box/category mismatch in a fund that you own, there's no need to be too concerned, but you may want to research it further. Go to the fund's Morningstar.com Portfolio page and look at its style box, including the centroid and ownership zone, in order to see exactly where the portfolio stands. If there's a disconnect, check up on the manager history to see whether a manager change has sparked a change in style. Morningstar's Fund Analyst Reports also do a good job of assessing the gamut of fundamental changes that may or may not be going on underneath a fund's hood: manager changes, strategy shifts, and upheaval at the fund company level.

Sponsor Center