Your Portfolio Meets Our New Style Box

Has your portfolio just gotten more "blendy"?

Now that we've introduced our new Style Boxes, many of you who use Portfolio X-Ray will notice a shift in your overall portfolio weightings toward the blend column and away from growth and value. Let me explain why that is, and why it's actually a good thing.

You're So Blendiful, Darling
Let's look at a real portfolio as an example: the Aggressive Wealth Maker portfolio that we manage in Morningstar FundInvestor. It's a portfolio we designed for investors with long time horizons, and who therefore can afford to hold a mix of 85% stocks and 15% bonds. Under our old Style Box methodology, if you ran this portfolio through X-Ray to see how its equity holdings were distributed across our nine-square Style Box, you would have seen the following: 

Old Style Box Methodology
	Value	Blend	Growth
Large Cap	39	8	22
Mid Cap	7	4	10
Small Cap	6	1	4

Lots of value, lots of growth, but little blend. With the new Style Box, the portfolio looks like this:

New Style Box Methodology
	Value	Core	Growth
Large Cap	20	29	18
Mid Cap	4	9	10
Small Cap	3	4	3

About equal weightings of value and growth, and a lot more blend--or rather, "core," which is our new name for these stocks. Why is that?

We treat portfolios--and the funds within those portfolios--as big collections of stocks, which they are. (Philosophically, we think the best way to analyze portfolios is to start from the bottom--at the individual stock level--and work our way up.) Under our old Style Box methodology, we labeled relatively few stocks as blend compared with growth and value stocks. Only 13% of our stock universe, in fact, was blend. Under our new methodology, by contrast, we classify roughly one third of our stock universe as growth, another third as value, and another third as core. A more intuitive breakdown, no? (For you methodology buffs, within each size grouping--large, medium, and small--we now make sure that the market values of value, core, and growth stocks are roughly equal.)

Stocks that once landed near the borderlines of our growth or value columns have shifted into core. Another way to look at it: It just got harder to qualify as a growth or value stock. We've upped the bar. The result is that our value and growth designations for stocks are far more pure--you can be more confident that we're really capturing growth and value traits. To take a few examples, we used to classify all of these stocks as growth: United Parcel Service (UPS), Tribune , Pitney Bowes (PBI) (!), and Kellogg (K). Needless to say, the term "growth" loses much of its power when it's diluted by names like these.

At the same time that we created a broad core group to replace the old narrow blend group, we also improved the way we define growth, value, and core. Formerly, we defined growth stocks as those with the highest price/earnings and price/book ratios. Value stocks were those with the lowest. Blend stocks were in the middle. Now, we look at 10 factors--five valuation metrics and five growth metrics--to decide which bucket a stock belongs in. The result is a much more accurate system, one that ends up classifying stocks in what intuitively is the most correct bucket.

A Sharper Focus
You can probably see now why I think the new system is better. In analyzing portfolios, the new Style Box offers a better lens--one better equipped to tell the difference between growth-type stocks and value-type stocks.

Let's return to the Aggressive Wealth Maker. The fourth-largest holding in the portfolio is Oakmark (OAKMX), a large-value fund. Under the old regime, we classified only 14% of Oakmark's portfolio as blend. Now, the percentage of core stocks is 57%. Big Oakmark holdings like AT&T (T), H&R Block (HRB), and Electronic Data Systems  have moved to core from either growth or value. This illustrates the fact that most value and growth managers dabble a lot in the middle--in stocks that have both value and growth characteristics.

Not all funds dabble, though. Those that invest on the edges of the Style Box--in pure growth or pure value--have roughly the same weightings under the new Style Box as the old. On the growth side, consider PBHG Growth . Even with the new Style Box, 87% of its portfolio is still in the growth column. On the value side, Hennessey Cornerstone Value (HFCVX) has fully 84% of its portfolio residing in the value column after the switch.

Let's say you wanted to make a big contrarian bet on growth stocks. If you hypothetically test a few growth funds by adding them to your portfolio--PBHG Growth, for example, versus Vanguard Growth Index (VIGRX)--and run it through X-Ray, you'll see that a fund like PBHG Growth dramatically increases your exposure to pure growth stocks. A fund like Vanguard Growth, on the other hand, actually has as many core stocks as growth stocks by our new way of reckoning. Both are growth funds, but an X-Ray analysis with the new Style Box shows how different their strategies really are--a difference blurred under our old system.

Should you make changes to your portfolio based on the Style Box shift? The answer's no, unless one of your goals is to invest exclusively in pure value or pure growth stocks (or both), and the improved Style Box shows that you're straying into core. If, on the other hand, you simply have rough targets for your portfolio weightings in each square--and many of us do--you're better off simply adjusting those targets in light of the new definitions rather than adjusting your actual holdings.

More Reading
For more information on the improvements to both the Style Box and the Star Rating (coming soon), check out this page in our Funds tab. We'll be collecting our articles on these topics here.