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Methodology Documents

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Methodology Documents

The target-date industry has shown many signs of a maturing, stabilizing market, though there's still plenty of dynamism to be found. Target date funds continue to upend expectations, but other less-favorable trends also continue.
Methodology Documents

This paper analyzes the trend of decreasing mutual fund fees against the recent history of growing total industry assets under management.
Methodology Documents

This study focuses on measuring Tracking Efficiency in Chinese equity ETFs. In order to better evaluate Chinese ETFs, this study focuses on more than tracking methods, as it also touches upon the following factors: trading costs, product and index construction, counterparty risk, and task considerations.
Methodology Documents

Morningstar has conducted qualitative, analyst-driven research on 529 college-savings plans since 2004, providing data on 84 traditional 529 plans, which are included in this study. Assets in 529 plans continue to climb, and plan sponsors have generally hired capable asset managers to run their plans’ assets, but continues to lag that of traditional open-end mutual funds.
Methodology Documents

This paper examines the relationship between asset managers' stewardship attributes and investor outcomes, and finds that better stewards of capital generally deliver better overall fund performance.
Methodology Documents

This paper discusses Morningstar's view of the 699 ETF managed strategies it tracks, giving investors and advisors insight into industry performance at Q42013.
Methodology Documents

Financial assets such as stocks and bonds ar only one component of an investor's total economic worth. Other assets, such as human capital, real estate, and pensions often represent a significant portion of an investor's total wealth. These assets, however, are frequently ignored by practitioners when building portfolios, despite the fact that they share common risks with financial assets. This paper provides evidence that industry-specific human capital, region-specific housing wealth, and pensions have statistically significant exposures to different asset classes and risk factors.
Methodology Documents

The net gearing ratio measures the volatility of a portfolio and the derivatives within it, based on the amount of borrowing the fund does. Here we examine how this ratio is calculated.
Methodology Documents

ETF managed portfolios are investment strategies that typically have more than 50% of portfolio assets invested in ETFs. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe.
Methodology Documents

When consumption and funding levels are combined and correct modeled, the true cost of retirement is highly personalized based on each household's unique facts and circumstances, and is likely to be lower than amounts determined using traditional models.
Methodology Documents

This paper offers historical evidence to support the notion that a higher allocation to equities is optimal for investors with longer time horizons and that the time diversification effect is relatively consistent across countries, persisting for different levels of risk aversion.
Methodology Documents

Occasionally, a fund will move from one Morningstar category to another because of a significant change in its investment process that abruptly leads to a substantially different portfolio. In such cases, the fund’s star rating is treated differently than with a routine category change: it is reset and calculations begin at the date of the significant restructuring. More about our method of dealing with these restructures is described within this document.
Methodology Documents

ETF managed portfolios are investment strategies that typically have more than 50% of portfolio assets invested in ETFs. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe.
Methodology Documents

Here, we present a concept that we call “Gamma,” designed to quantify the additional value that can be achieved by an individual investor from making more intelligent financial planning decisions. Gamma will vary for different types of investors and for different strategies; however in this paper we focus on five fundamental financial planning decisions/techniques: a total wealth framework to determine the optimal asset allocation, a dynamic withdrawal strategy, incorporating guaranteed income products (i.e., annuities), tax-efficient decisions, and liability-relative asset allocation optimization.
Methodology Documents

A Morningstar analysis of the average industry glidepath shows it will meet most retirees' spending needs, and funds with significantly different asset allocations have delivered similar returns in recent years. Other factors may contribute to these investments' relative success over the long term. A new Morningstar study of data on the firms offering the target date series suggests a tie between better stewardship practices and stronger risk-adjusted performance.
Methodology Documents

This methodology document addresses the return calculation for fixed-rate and zero-coupon bonds. The methodology does not currently address other types of bonds such as floating-note bonds, mortgage-backed and asset-backed bonds, Treasury Inflation-Protected Securities, and so on.
Methodology Documents

ETF managed portfolios are investment strategies that typically have more than 50% of portfolio assets invested in ETFs. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe.
Methodology Documents

Total portfolio refers to a portfolio with a strategic asset-allocation policy consisting of multiple asset classes implemented with various investment managers. This document outlines several methods of attributing performance, including the classic approaches of Brinson, Hood, and Beebower and Brinson and Fachler, the principles upon which today's performance attribution methodologies are founded. It describes Morningstar's recommended method, the top-down geometric method.
Methodology Documents

Research that has led to what is known as the "low volatility anomaly" in cross-sectional stocks from a similar universe indicates that volatility is not compensated with a "volatility" premium. We find evidence of a risk premium, but it depends on the definition or measure of risk. "Tail risk" measures the probability of having significant losses and should be what investors care about the most. We investigated several risk measures, including volatility and tail risk, and found that volatility is not compensated but tail risk is compensated with higher expected return in both U.S. and non-U.S. equity funds.
Methodology Documents

Morningstar's quantitative ratings are available for more than 28,000 companies in 86 countries that trade on 64 exchanges, allowing investors to obtain a much greater breadth of the independent perspective they know and trust from Morningstar.
Methodology Documents

The Global Fund Investor Experience report measures the experiences of mutual fund investors in 24 countries in North America, Europe, Asia, and Africa. Morningstar researchers evaluated countries in four categories—regulation & taxation, disclosure, fees & expenses, and sales & media.
Methodology Documents

Morningstar has conducted qualitative, analyst-driven research on 529 college-savings plans since 2004 and has transitioned to a new ratings scale. The Morningstar Analyst Rating® for 529 College-Savings Plans is the summary expression of our forward-looking analysis of a 529 college-savings plan.
Methodology Documents

Recent literature indicates that a liquidity investment style – the process of investing in relatively less liquid stocks within the liquid universe of publicly traded stocks – has led to excess returns relative to size, value, and momentum. We examine whether this style can be uncovered not just at the stock level, but at the mutual fund level.
Methodology Documents

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.
Methodology Documents

After-tax returns are measures of fund performance that take into account the taxes a hypothetical investor pays on fund distributions and capital gains. This methodology document addresses Morningstar’s interpretation of the 2001 Securities and Exchange Commission guidelines and changes that arose from the Jobs and Growth Tax Relief Reconciliation Act.
Methodology Documents

This article reviews the motivation for multiplying by root 12 and explains why it does not apply to returns. It then shows the derivation of the correct method to help the reader understand why it is in fact correct.
Methodology Documents

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. Target-date funds are marketed as a one-decision, comprehensive investment option for investors' retirement savings.
Methodology Documents

In this paper we introduce a model that takes into account current bond yields and allows them to “drift” 3 toward a higher value during retirement using an autoregressive model based primarily on historical relationships between asset classes. This approach can better replicate the actual bond returns a current or near retiree can expect during retirement both now and in the future.
Methodology Documents

Social Security (SS) is the largest source of retirement income for most Americans. This paper provides the reader with an overview of the SS retirement system and offers insight into key factors that should be considered when determining when to begin receiving SS retirement benefits.
Methodology Documents

The rating methodology described herein applies to the new issue of a resecuritization of one or more U.S. nonagency RMBS securities. In a typical Morningstar rated resecuritization, one or more securities are pledged to a trust as eligible collateral. All principal and interest collections from the pledged securities, or underlying securities, are paid to the resecuritization trust and distributed to the resecuritization securities in accordance with the resecuritization waterfall. Losses are generally allocated in reverse sequential order with the most junior tranche allocated losses first.
Methodology Documents

The Morningstar Rating™is a quantitative assessment of a fund's past performance--both return and risk--as measured from one to five stars. It uses focused comparison groups to better measure fund manager skill. The Morningstar Rating is intended for us as the first step in the fund evaluation process. A high rating is not a sufficient basis for investment decisions.
Methodology Documents

This paper explores the potential benefit an investor (i.e., consumer) can achieve by postponing deferrals into a 401(k) plan and paying off credit card debt instead. Through an analysis we determine that an investor who first pays off a credit card and then saves for retirement, versus just making the minimum credit card payment, can potentially increase his or her 401(k) balance at retirement.
Methodology Documents

In this updated and expanded report, we build upon our original examination of synthetic exchange-traded funds (ETFs) in Europe, highlighting recent progress made by providers towards increasing the degree of investor protection within their products and the level of transparency around them.
Methodology Documents

In this paper, we will discuss proprietary Morningstar ETF data points, which can serve as tools to measure the true cost of ETF ownership. These data points help quantify the investor experience of owning an ETF and allow for better fund selection. Selecting the right ETF involves more than just picking the cheapest fund within a category. At the same time, combining all of these factors to determine the best ETF can be overwhelming. This is why we have begun quantifying the ETF investor experience.
Methodology Documents

This paper explores important differences in the definitions of the expected replacement ratio and elaborate how, like any type of projection involving multiple variables over an extended duration, replacement rate estimates estimates can vary materially based on different assumptions and provide varying levels of insight. Based on this analysis, we would strongly suggest plan fiduciaries be cautious with respect to these projections before basing any decisions on the values.
Methodology Documents

The sole aim of this paper is to explain why it’s so important for closed-end funds to improve their transparency and release full portfolio holdings on a more frequent basis than has been the case historically.
Methodology Documents

The purpose of this study is to first establish a framework to evaluate different withdrawal strategies and second to use that framework, in conjunction with Monte Carlo simulations, to determine the optimal withdrawal strategies for various case studies. To establish the framework, we introduce a new metric, the “Withdrawal Efficiency Rate” (WER), which measures the relative efficiency of various withdrawal strategies.
Methodology Documents

This document addresses the methodology for The Morningstar Category™ classifications for hedge funds. Morningstar supports 31 hedge-fund categories, which map into the following six broad category groups: directional equity, relative value, directional debt, global/derivatives, event, and multistrategy.
Methodology Documents

This article notes that benchmark-relative comparisons will not tell you if the glide path itself is “good.” We believe the evolving asset allocation is going to be the primary driver of performance and have the greatest effect on the level of returns and income realized by the investor. We also explore the appropriate use of a target date benchmark, and include a concrete example of how to benchmark a target date fund / fund family.
Methodology Documents

In this paper, we define what the equity risk premium is and how it can be used in equilibrium and beat-the-market contexts. We also discuss various other premiums in the market that represent the differential returns of the many different asset classes and investment styles in the market. To make sound investment decisions, it is important to have good estimates of these premiums.
Methodology Documents

Some people argue that investors should allocate assets entirely to bonds, not only because bonds are the safer investment but also because they believe bonds will outperform stocks over the long run. In other words, if bonds can deliver higher returns than stocks with less risk, why bother with stocks? We look into this viewpoint.
Methodology Documents

This article explains how the Morningstar Dividend Composite Index and the Morningstar Dividend Leaders Index are constructed. The weighting system used in these indexes is designed so that the indexes are highly macro consistent, investable and have low turnover.
Methodology Documents

The rating methodology described herein will generally be applied to the new issuance and surveillance of ratings of U.S. residential mortgage-backed securities by Morningstar Credit Ratings, LLC (“Morningstar”). A rating that is assigned based on this methodology 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 RMBS securities. This methodology includes a new section on mortgage insurance analysis and clarifying edits. It supersedes the criteria published in May 2015 and is in effect immediately.
Methodology Documents

Mean-variance optimization has been the standard for creating asset allocation strategies. In Morningstar's asset allocation optimization methodology document, we describe the limitations of MVO and discusses asset-class modeling and portfolio optimization techniques that overcome some of these shortcomings.
Methodology Documents

This document describes the methodology behind the Morningstar Analyst Rating™ for U.S. closed-end funds; the summary expression of our forward-looking analysis of a fund. Ratings are assigned globally on a five-tier scale. Our global analyst team has identified five key areas that we believe are crucial to predicting the future success of funds: People, Parent, Process, Performance, and Price.