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.

Some proponents of fundamental indexation claim that the strategy is based on a new theory in which market prices of stocks deviate from fair values. A key assumption in this approach is that fundamental weights are unbiased estimators of fair value weig

The Morningstar Stewardship Grade℠ for mutual funds is designed to help investors further research, identify, and compare fund managers and fund companies that do a good job--or a poor job--of aligning their interest with those of fund shareholders. The

This paper studies the role of U.S. Private Equity and Non-U.S. Private Equity in a strategic asset allocation. There is relatively little guidance in the literature on how much investors should allocate to private equity in a strategic asset allocation

Using from January 1995 to November 2006, this paper studies the relationship between performance and fund flow and the relationship between performance and asset size for funds of hedge funds. The findings confirmed that funds of hedge funds that have b

We measure how much serial correlation there is in mutual fund returns.

Morningstar calendar year category averages measure how a category performed over a specific year while correcting for the effects of survivorship bias and category changes. This document provides details on how these averages are calculated.

Morningstar® Stewardship Rating for Stocks represents our assessment of management's stewardship of shareholder capital, with particular emphasis on capital allocation decisions.

Morningstar Rating for stocks represents our opinion, on a risk-adjusted basis, of the firm's intrinsic value relative to its market price. There are three components to the Morningstar Rating for stocks: our analysts' estimate of the stock's fair value;

This paper presents an equity index weighting scheme that combines features of market-cap and fundamental weighting that we call "collared" weighting. We use market-capitalization to assign initial individual security weights and fundamental factors used

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

In this book for The Research Foundation of CFA Institute, we review the traditional investment advice model for individual investors, briefly introduce three additional factors that investors need to consider when making investment decisions, and propos

How to measure how much a hedge fund hedges and how much alpha it provides.

This study creates savings guidelines for typical individuals with different ages, income levels, and initial accumulated wealth so the public can more easily determine how much to save for retirement. It also creates benchmarks for how much capital an i

Many professionals use only one method of style analysis, and researchers at Morningstar wanted to determine if the holdings-based and returns-based methods were fair substitutes for each other. Two separate Morningstar studies evaluated results and assu