Methodology Documents

Morningstar has conducted research on active and passive investment strategies and their associated vehicles since 1986.

This paper outlines the key assumptions and details behind our quantitative equity rating methodology.

We believe that a company's intrinsic worth results from the future cash flows it can generate. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic worth--or fair value estimate, in Morningstar terminology.

This document describes the rationale for, and the formulas and procedures used in, calculating the Morningstar Rating for funds (commonly called the “star rating”). This methodology applies to funds receiving a star rating from Morningstar.

This paper outlines the key assumptions and details behind our quantitative equity rating methodology.

Morningstar developed the Morningstar Equity Comparables system to give investors and financial professionals an objective benchmark for comparing companies. Morningstar Equity Comparables is genuinely different to other industry classification schemes. We start from the bottom up with comparable companies, as opposed to the top down with sector definitions. For every pair of companies, we determine how similar they are–anywhere from closely comparable to distantly related based on automated analysis of the companies' own business description. We automatically analyse the text of the business description and work out whether companies are talking about similar things as they describe their businesses. Businesses described in similar terms are comparable.

Morningstar Credit Ratings Definitions and Other Related Opinions and Identifiers This document sets forth Morningstar's credit definitions, ratings symbols and other related opinions and identifiers for evaluating the credit risk in structured finance t

Ratings of individual debt instruments may be adjusted up or down from the Consolidated Corporate Rating to take into account the individual security's priority of payment. Priority of payment for an individual debt instrument is determined by its issuer

Morningstar's bank credit rating methodology is based on the same key components, or pillars, as its methodology for nonfinancial corporations: Business Risk, Solvency, Distance to Default, and a bank stress test, which is analogous to the Cash Flow Cush

Morningstar Category classifications sorts portfolios into peer groups based on their holdings. The categories help investors identify the top performing funds, assess potential risk, and build well-diversified portfolios. Here is how those categories ar

Modern Portfolio Theory Statistics (MPT statistics) are based on the Capital Asset Pricing Model (CAPM) of expected returns developed by Nobel laureate William Sharpe and others in the early 1960s. The CAPM is based on Modern Portfolio Theory (MPT) devel

Estimated holding cost, tracking volatility, market impact cost, and portfolio concentration are all data points used in our ETF ratings. In this document, we describe the method of calculation for each of these points.

This methodology document addresses the target-date fund series rating and research reports methodology. Morningstar Target-Date Fund Series Ratings and Research Reports are designed to help individual investors, financial advisors, plan sponsors, and ot

This document describes the methodology of assigning Morningstar Institutional Categories for portfolios such as mutual funds, exchange-traded funds, and separate-account strategies available for sale in the U.S.

This document is for the investment managers, transfer agents and custodians who send portfolio reports to Morningstar. It covers how portfolio files should be organized in order to ensure that Morningstar can process files in a timely and accurate manne

Morningstar divides countries of the world into 13 different geographic regions, based on equity assets only. The 13 regions can also be folded into three super geographic regions: the Americas, Greater Europe and Greater Asia.

This document addresses the Morningstar estimated performance methodology.

This document addresses the Morningstar Equity Research performance methodology overview.

Morningstar reviews and updates our categories annually. Morningstar categories provide the peer groups that Morningstar ratings are based upon.

This document sets forth Morningstar's definitions and descriptions of its ratings symbols, ratings outlooks, and surveillance for evaluating the credit risk in structured finance transactions. Morningstar’s determination to review a structured finance t

Morningstar calculates gross returns for funds as a simulation of the returns investors would have received had they not paid any expenses. Here are the formulas.

Morningstar reviews and updates our categories annually. Morningstar categories provide the peer groups that Morningstar ratings are based upon.

Selecting a target-date fund is one of the most important decisions a plan sponsor or consultant can make. In this paper, we present an innovative, quantitative approach that Morningstar has developed for determining which glide path will best fit a spe

This methodology describes Morningstar’s approach to issuing letter-grade ratings for commercial mortgage- backed securities (CMBS) at issuance. Any determination to issue letter-grade ratings is in Morningstar’s sole discretion in accordance with M

The emergence of buybacks as the dominant source of corporate payout over the past three decades fundamentally changed the way returns are supplied to investors, creating the need for a new return model. We develop total payout (dividends plus buybacks)

The rating criteria described herein will generally be applied to ratings of RMBS Servicer Advance Receivables securitizations (“Advance Securitizations”) by Morningstar Credit Ratings, LLC (“Morningstar”). The methodology is designed to be easy to under

These criteria address Morningstar Credit Ratings, LLC’s (“Morningstar’s”) methodology for evaluating a securitization trust’s representations and warranties framework with respect to the loan-level reps and warranties available to securitization trust i

The rating methodology described herein will be applied to the new issue and surveillance ratings by Morningstar Credit Ratings, LLC (“Morningstar”) of securities backed by pools of single-family rental properties ("Single-Family Rental Securities"). The

Managed accounts can personalize asset allocation, help with savings goals, and make annuity recommendations. Costs and due diligence are often greater than for target-date funds, but managed accounts’ advantages outweigh the disadvantages. We expect man

This methodology describes Morningstar’s surveillance approach to rating commercial mortgage-backed securities (CMBS). Morningstar conducts its monitoring and surveillance activities via both an investor-paid subscription platform and an issuer-paid plat

This guide introduces the reader to the Morningstar CMBS Subordination Model. It starts out with a description of the basic concepts underlying the model and details its primary features. As with any model, ours utilizes a number of assumptions. We endea

Morningstar’s analysis and considerations for rating securities (“Resecuritization Securities”) backed by CMBS securities (individually, an “Underlying Security”, collectively, “Underlying Securities”) are focused on the resecuritization of a single Un

This paper builds on the Gamma concept by determining the optimal goals-based strategy for financial planning. We find that selecting the right goals to fund and the best way to fund them delivers Gamma.

The asset-backed securities market in the U.S. has evolved from the first equipment lease and auto loan deals issued in the mid-1980s to a dynamic market where a panoply of consumer assets, commercial assets, operating assets and nontraditional assets ar

Operational risk assessment is an opinion regarding the noncredit related risks associated with a servicer’s or vendor’s performance, or expected performance, of certain functions in finance transactions, with an emphasis on how such risks may impact inv

As more fully described below, an operational risk assessment is an opinion regarding the non-credit related risks associated with a servicer’s performance, or expected performance, of certain functions in finance transactions, with an emphasis on how su

This paper is a roundup of notable meetings that Morningstar manager research analysts have held recently with portfolio managers and other fund company representatives.

We discuss how momentum, popularity, price, and performance interact in the market. Offshoot of an article in the Journal of Portfolio Management.

This paper discusses Morningstar's view of the 699 ETF managed strategies it tracks, giving investors and advisors insight into industry performance during Q12014.

The quarterly review of the market across sectors by the Morningstar Markets Research Team.

In this document, we provide a detailed overview of how the Morningstar Rating for stocks is derived, and also outline the analytical work that feeds into our coverage of stocks.

This paper discusses the potential benefits of Expert Guidance, or professional online retirement advice, on the savings and investing decisions of individual participants of defined contribution plans, such as 401(k) plans.