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.

This article explains why the air is coming out of the argument that fundamental indexing is a revolutionary innovation.

The importance of asset allocation has been the subject of considerable debate and misunderstanding. What seems like an easy question or topic on the surface is actually quite complicated and filled with nuance. In an article written by Thomas Idzorek, J

The 2011 Industry Survey updates much of the data from the 2010 edition while providing new features on asset allocation, performance attribution, and portfolio composition — particularly among retirement-income funds, the terminal funds in many target-d

This paper provides a brief summary on the importance of asset allocation, while noting that nowhere near 90 percent of the variation in returns is caused by the specific asset allocation mix. It highlights that most time-series variation comes from gene

What is the relative importance of asset allocation policy versus active portfolio management in explaining variability in performance? This paper shows that, with market movements removed, asset allocation and active management assume equal importance i

A model called the Truncated Lévy Flight builds on Benoit Mandelbrot’s stable hypothesis to accurately capture the market’s fat tails.

We investigate the impact of mean-conditional value-at-risk (M-CVaR) optimizations that take into account fat tails and skewness on optimal asset allocation. In a series of controlled optimizations, we compare optimal asset allocation weights obtained fr

This paper studies a variety of asset allocation issues associated with deferred variable annuities with guaranteed minimum withdrawal benefits for life (VA+GMWB) with the goal of developing a framework for the construction of optimal retirement portfoli

This document describes the rationale for, and the formulas and procedures used, to calculate the Morningstar Hedge Fund Operational Risk Flags.

The idea of an economic moat refers to how likely companies are to keep competitors at bay for an extended period. Morningstar calculates an average economic moat score for mutual funds by using the economic moat ratings assigned to the fund’s stock hold

This article discusses the level of overlap among style index providers, and the implications for investors using style-based indexes. It explores the differences in performance within style families and the serious ramifications for investors’ portfolio

In August 2017, Morningstar will begin calculating many of its category percentile ranks and category averages using fractional weighting.