Skip to Content
  1. Research
  2. Methodology Documents

Methodology Documents

Latest

Methodology Documents

Methodology paper explaining how Morningstar calculates the average bond price for a portfolio.
Methodology Documents

Profit margins have expanded rapidly over the past three decades. That, combined with strong optimism for future growth, has driven market earnings multiples to extreme levels. We view overall stock market valuations as stretched, with close to 60% of our universe trading above our fair value estimates as of October 2017. While we do expect a partial reversion to the historical valuations of the past as economic pressures build, the durability and defensibility of the largest firms’ competitive positions suggest that profitability levels will not fully revert to historical midcycle levels.
Methodology Documents

All-time high flows, paired with positive returns, lifted assets in target-date mutual funds above $1 trillion in 2017. This year's report covers recent developments in the competitive landscape, and then it highlights noteworthy considerations for target-date investors in five areas: Price, Performance, Parent, People, and Process.
Methodology Documents

U.S. President Donald Trump recently shook up global financial markets by announcing plans to enact import tariffs of 25% on steel and 10% on aluminum. The exact form these tariffs will take remains unclear. We've updated our forecasts and fair value estimates based on the expectation of a targeted approach. A blanket tariff covering all imports would be far more severe and, in turn, far more beneficial to U.S. steel and aluminum producers. The consequences for U.S. metal users, while significant in aggregate, are far more diffuse, impacting industries from aerospace to aluminum cans. Accordingly, our long-term forecasts and fair value estimates for these companies aren't meaningfully affected. Harmful second order effects, including retaliation by U.S. trade partners, are possible, but we have not assumed major moves in our base case forecasts. Perhaps the most damaging of potential reactions would be cancellation of significant Boeing aircraft orders by Chinese customers.
Methodology Documents

Morningstar created extended performance statistics to “fill in the gap” between the inception date of a new share class or distribution channel and the inception date of the original portfolio. Extended performance lengthens the performance data that is available for the younger investment. This helps investors see how the portfolio as a whole has performed over time.
Methodology Documents

To receive safe harbor regulatory protections, defined-contribution plan sponsors must, among other things, follow a prudent process for selecting a qualified default investment alternative. This includes considering the specific demographics of the participants when making a QDIA selection. Unfortunately, regulations do not provide much of a blueprint on how to consider demographics. This paper presents a framework for using participant data to help determine which type of QDIA may be most appropriate, including which glide path best fits the demographics of plan participants, when a custom glide path may make sense, what the “pivot” age should be for a hybrid QDIA, and when managed accounts may be necessary for meeting the unique needs of a plan.
Methodology Documents

This methodology addresses the assumptions and formulas used in calculating the Total Return. This methodology is only applicable to interest rate series that are updated at a daily frequency. It is intended for interest rate indices with one or less years to maturity.
Methodology Documents

Taxable bond was once again the Morningstar category group with the largest inflows last month, as investors sought to lock in the gains of an almost-nine-year bull market and continued to rebalance from stocks to bonds.
Methodology Documents

We draw on results from a survey of U.S. adults to create a model of financial health. Using demographic, psychographic, emotional, and behavioral variables, we show that financial behavior and emotional well-being are affected by two simple mental factors that advisors can target to better help their clients achieve financial health.
Methodology Documents

An $8.7 billion inflow is impressive for a category group that’s usually in outflow territory. Investors poured $27.6 billion into passive U.S.-equity funds last month, more than doubling the previous month’s $12.7-billion inflow. U.S. GDP growth has been at around 3.0% for two quarters in a row, and Washington has recently been focused on passing a tax bill that would significantly reduce corporate tax rates and make it easier for businesses to increase profitability.
Methodology Documents

Despite expectations of rising rates, taxable bond was once again the most popular category group in September with $34.9 billion in flows overall, significantly higher than the $27.5 billion it had received in August. In a reversal from the previous month, passive taxable-bond flows surpassed active ones: $20.5 billion versus $14.4 billion.
Methodology Documents

Taxable bond remained the leading category group in August with $27.5 billion in flows overall. Unlike in June and July, however, active taxable-bond flows surpassed passive ones: $14.1 billion versus $13.3 billion.
Methodology Documents

Morningstar category averages are designed to represent the average return of funds within their category over time. Morningstar creates a category average daily total return index series, or TRI, as well as monthly, quarterly, and annual averages of return and non-return data.
Methodology Documents

Morningstar provides data on individual securities registered in dozens of countries, but researchers evaluating those investments often have a need to study groups of investments as they're branded in a local market.
Methodology Documents

This document details the methodology for the Morningstar Total Return Index, calculated at the fund level and representing the value over time of one share purchased and owned since inception, assuming all dividends and distributions are reinvested.
Methodology Documents

Far from experiencing a slowdown, taxable bond and international equity saw a lot of activity in July. The two Morningstar category groups attracted $34.7 billion and $23.0 billion, respectively. For both, the majority of these flows came from passive funds. Active flows, in the meantime, remained positive and considerable in size.
Methodology Documents

Taxable Bond and International Equity Continue to Dominate Flows Investors continued to stream money into taxable-bond and international-equity funds in June. Unlike in previous months, the taxable-bond Morningstar category group saw higher inflows on the passive front than on the active one, although active flows still remained substantial at $14.4 billion.
Methodology Documents

After five encouraging months and a so-and-so April, the U.S. equity category group slid into outflow territory in May, with total redemptions of $3.1 billion. Taxable bond remained the overall leader with inflows of $36.9 billion, and international equity came in a close second, attracting $35.7 billion.
Methodology Documents

The Morningstar Portfolio Product Involvement metrics measure a portfolio’s exposure to involvement in a range of products, services, and business activities. The metrics are holdings-based calculations that use company-level analytics from Sustainalytics, a leading ESG research provider. The metrics are calculated for managed products globally using Morningstar’s portfolio holdings database.
Methodology Documents

For investment portfolios that hold meaningful levels of fixed-income holdings, Morningstar produces a number of calculated fixed-income analytic measures. Portfolio analytic measures are created by first calculating corresponding holding-level measures and then aggregating the values to a portfolio level through a process known as holding-based analytics.
Methodology Documents

For managed investments such as mutual funds, Morningstar calculates average effective maturity. This measure is the holding-weighted average of the terms of the individual instruments within the portfolio. With this measure, investors can analyze exposure to interest-rate risks and reinvestment risks as well as estimate whether an investment aligns with future liability needs.
Methodology Documents

Fixed-income analysis is inherently an exercise in the measurement of future cash flows. Payments of interest on principal invested constitute the primary means of return to fixed-income investors with the expectation that the principal will be repaid upon maturity. Therefore, measuring the expected rate of return and potential risks to these payments is of paramount importance.
Methodology Documents

After four months during which U.S. and international-equity funds attracted similar inflows, international equity took the lead in the equity space with a little over $21 billion in total flows. U.S. equity's winning streak seems to have waned, as the category group received only a meager $280 million in April 2017.
Methodology Documents

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 are decided upon and funds assigned to them.
Methodology Documents

Some Flows Are Going Into Equity, but Fixed Income Is Still in the Lead Taxable-bond funds attracted the highest inflows once again in March, even higher than they had in February. The flow this month was almost evenly distributed between active and passive taxable-bond funds, underlining that in fixed income, as opposed to equity, active management is still very much alive.
Methodology Documents

The Morningstar Style Box™ was introduced in 1992 to help investors and advisors determine the investment style of a fund. It provides an intuitive visual representation of style that helps investors build better portfolios and monitor them more precisely.
Methodology Documents

This methodology describes Morningstar’s approach to issuing letter-grade ratings for commercial mortgage-backed securities at issuance and during surveillance.
Methodology Documents

Bonds Still in Favor, With U.S. Equity Close Behind Taxable-bond funds remained the undisputed favorites in February, attracting $35.5 billion in estimated net flows. U.S. equity funds, however, received double the flows they had taken in the previous month.
Methodology Documents

Any new beginning is uncertain, and this held true for markets in the first month of 2017. The new president’s promises of tax cuts and infrastructure spending appeared to spur newfound confidence in U.S. equities late last year, driving flows into U.S.-equity funds in November and December. January, however, saw a much smaller amount stream into U.S.-equity funds, and the majority of the flows redirected to fixed-income and international-equity funds.
Methodology Documents

Morningstar data point explanation.
Methodology Documents

If you help your clients raise financially fit kids, everyone wins: Your clients get peace of mind that their children will be better equipped for life on their own, the children get a financial head start to prepare them for financial independence, and your practice benefits from stronger client relationships and, potentially, a new generation of clients. Our new paper examines: Why learning by example isn’t enough to prepare kids for financial independence. Simple rules of thumb that advisors can encourage their clients to use when teaching their children about money and why parents should be more transparent with their children about their money situation.
Methodology Documents

Helping your clients navigate personal relationships might not be your favorite talking point, but your willingness to tackle the issue head-on could be key for your business. Our paper, Financial Turning Points: Relationships, Marriage, and Divorce, examines: How prenuptial agreements and “freedom funds” should be seen as romantic, rather than restricting. How advisors can help their clients learn to argue productively—and why they should. Why tracing financial behavior back to underlying needs is important when married clients have different attitudes about money. How advisors can help clients cope with post-divorce financial reality.