How to Use the Morningstar Style Box

Identifying Mutual Fund Style

morningstar style box
Learn how to use the Morningstar Style Box (TM). Morningstar

When reviewing mutual fund style, you may have run across a gridded box that looks something like a game of tic-tac-toe. If so, you may have been looking at the style box from Morningstar, a firm that offers tools, such as software for professionals, and research information available to all levels of mutual fund investors online at Morningstar.com. Morningstar also extends their information and commentary to Exchange Traded Funds (ETFs) and Hedge Funds.

The Basics on Fund Style for Stock Funds

A stock mutual fund's style can be considered as a combination of two components: 1) Whether it has a value, growth, or blended objective and 2) The average market capitalization of holdings, expressed as large, mid, or small. The Morningstar Style Box, which is their proprietary, trademarked tool, then combines the two into a grid (see image at top of this page, which identifies a "large growth" stock fund with the upper-right square of the grid filled in black).

The Basics on Fund Style for Bond Funds

A bond mutual fund's style can also be considered as a combination of two components: 1) The average duration (similar to maturity) of the underlying portfolio holdings and 2) The average credit quality of the bond holdings.

Here's what Morningstar says about its Style Box:

This is a proprietary Morningstar data point. The Morningstar Style Box is a nine-square grid that provides a graphical representation of the "investment style" of stocks and mutual funds. For stocks and stock funds, it classifies securities according to market capitalization (the vertical axis) and growth and value factors (the horizontal axis). Fixed income funds are classified according to credit quality (the vertical axis) and sensitivity to changes in interest rates (the horizontal axis).

By providing an easy-to-understand visual representation of stock and fund characteristics, the Morningstar Style Box allows for informed comparisons and portfolio construction based on actual holdings, as opposed to assumptions based on a fund's name or how it is marketed. The Style Box also forms the basis for Morningstar's style-based fund categories and market indexes.

Also See: Mutual Fund Analysis: 10 Things to Analyze (and 3 to Ignore)