Methodology Documents

For an investor, risk is not merely the volatility of returns, but the possibility of losing money.

The Morningstar Category™ classification system for funds lets institutions, advisers and investors effectively compare like funds.

The Morningstar Category™ classification system for funds lets institutions, advisers and investors effectively compare like funds.

The Morningstar Category™ classification system for funds lets institutions, advisers and investors effectively compare like funds.

Morningstar Indexes were created to provide investors with accurate benchmarks for performance measurement, as well as offering discrete building blocks for portfolio construction.

Morningstar’s aim is to help investors determine a Listed Investment Companies (LICs) overall investment merit to help them construct diversified portfolios and achieve their goals.

The paper details Morningstar's custom yield calculation.

This document supplements the methodology document for the Morningstar Style BoxTM. This provides additional information about how to rescale the size score for a fund

The Sector Delta is an equilateral triangle that depicts a portfolio’s super sector allocation, relative to a benchmark, on a two dimensional space.

When it comes to the benchmarking of target maturity funds, the cart has been in front of the horse.

Morningstar has a rich tradition of holdings-based analysis of mutual funds and other investment portfolios. The portfolio holdings provide insight into the manager’s strategy and help investors determine if an investment might be appropriate for them.

The Similar Funds tool will generate a list of investments that are similar to a user-specified offering. This methodology is based upon several factors including the category, special criteria, portfolio allocation, and performance of the fund provided.

An essential complement to our database of investment information and our suite of quantitative research tools, Morningstar's target-date series analysis focuses on helping fiduciaries make better investment decisions with plan participants' retirement funds

In its annual Target-Date Industry Survey, Morningstar shines a sweeping light across target-date funds, which have become a primary tool for Americans’ retirement savings.

A commonly used measure of return volatility is the standard deviation of monthly returns multiplied by to express it in the same unit as annual return

Morningstar’s UIT composite return combines the returns of each series within a strategy to measure how the strategy has performed over different time periods

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 transactions and corporate and financial institution obligations.

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's place in the corporate structure, its seniority with respect to other debt, and the collateral securing it (if any).

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 Cushion for nonfinancial corporations. The methodology combines qualitative judgments with observable financial and market data to arrive at a model-derived credit score. However, the model score is only an input to the rating committee's final rating decision. The rating committee may accept or modify the model score to take into account trends in performance, anticipated company actions, or macroeconomic developments that may not be reflected in the model.

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) developed in the 1950s by Sharpe’s teacher and co-laureate Harry Markowitz.

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 other interested fiduciaries make informed decisions when evaluating a series of target-date funds.

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 manner. In particular, it references futures, forwards, short positions, swaps, and options that are held by mutual funds and other managed products.

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 document addresses the Morningstar estimated performance methodology.

This document addresses the Morningstar Equity Research performance methodology overview.

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 transaction is performed on a case by case basis in accordance with Morningstar’s policies and procedures set forth on Morningstar’s website at www.morningstarcreditratings.com.

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.

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 specific plan’s needs.

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 Morningstar’s policies and procedures on a case by case basis and Morningstar may, at any time, decline or refuse to rate a transaction for any number of reasons, including, without limitation, the failure or refusal of the arranger or other third parties to provide information to Morningstar

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) models of stock returns that are independent of the change in corporate payout policy, and allow for a consistent analysis of the historical sources of returns. Our study provides significant theoretical and empirical evidence that total payout models provide superior forecasts of both long- and short-term expected returns.

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 investors. These reps and warranties are typically provided by the loan seller (either directly, or assigned to the trust by the seller from a previous holder in the case of newly originated loans, typically the originator) to give investors remedies when certain loan “defects” may arise. These defects typically relate to aspects of the loan that are part of the origination process. The framework available to remedy a breach of any of these reps and warranties is negotiated between the seller(s) and the trust. The rep and warranty framework can therefore vary substantially between each seller and each trust.

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 single-family houses generally are investment properties that are rented to existing tenants or available to be rented to new tenants. The methodology is designed to be consistently applied to both new issue and surveillance of Single-Family Rental Securities where applicable. However, as a transaction seasons, actual performance data will influence the assumptions used in determining whether to maintain or change a rating.

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 understand and the framework can be consistently applied to Morningstar-rated advance securitizations while incorporating issuer-specific quantitative and qualitative data. A rating that is assigned based on these criteria should provide market participants with a risk benchmark that can be used to gauge the relative default risk of a security against that of other servicer advance securities. This methodology will be effective when Morningstar issues its first presale report on an advance securitizations.

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 managed accounts to become more popular, less expensive, and more efficient.

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 endeavor to base these assumptions on empirical data whenever robust data is available and default to industry experience and intuition when it is not. This paper discusses the concept behind the assumptions.

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 Underlying Security that is being resecuritized into one or more Resecuritization Securities with new and/or additional creditsupport level(s) (a “Re-Tranching Transaction”), and (2) the resecuritization of a portfolio of Underlying Securities that is being resecuritized into multiple classes of Resecuritization Securities with potentially multiple categories of ratings (a “Re-REMIC Transaction”). References herein to ratings by Morningstar shall mean either: (i) ratings by Morningstar at issuance as an agency selected by the issuer or arranger to rate the related transaction or (ii) initial investor-paid surveillance ratings by Morningstar on the related transaction post issuance for transactions Morningstar did not rate at issuance.

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 platform that provides letter-grade ratings and ratings outlooks on all CMBS transactions for which we are engaged by the issuer to provide ratings, and an additional subset of CMBS for which Morningstar initiates ratings without an issuer’s mandate to the extent consistent with Morningstar’s policies and procedures. In addition, Morningstar also provides publicly available surveillance with respect to transactions for which Morningstar was hired to rate at issuance.

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.

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 investors, and on the effectiveness of the servicer’s and vendor’s protocols to mitigate such risks. Other information posted to Morningstar’s website at https://ratingagency.morningstar.com, including the “Operational Risk Assessment” link, should be considered and reviewed in conjunction with this document.

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 such risks may impact investors, and on the effectiveness of the servicer’s protocols to mitigate such risks. Other information posted to Morningstar’s website at https://ratingagency.morningstar.com, including the “Operational Risk Assessment” link thereon, should be considered and reviewed in conjunction with this document.

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 are being securitized, and new asset classes and structures continue to emerge and develop. Despite the contractions that occurred in the structured finance markets during the 2007 financial crisis and its aftermath, ABS securitizations continue to play a vital role in the capital markets.

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.