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| Methodology Overview |
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| Based on the same methodology as the well-known Morningstar
Style BoxTM, Morningstar has developed
a comprehensive family of 16 indexes that target 97% coverage of the
U.S. equity market. The recently enhanced style methodology, which
uses ten factors to identify distinct growth and value attributes,
creates an integrated framework for stock research, portfolio assembly,
and market monitoring.
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| Index Design Objectives |
| To meet the needs above, Morningstar's indexes were
designed with the following objectives: |
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Achieve broad market coverage without sacrificing investability |
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Measure stocks' value and growth orientation in line
with market practitioners and stock analysts |
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Maximize performance distinctions between growth and
value—high negative correlations between growth and value stocks |
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Classify each stock uniquely (i.e., each stock belongs
to only one of the nine style indexes) |
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Minimize turnover |
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| Index Eligibility—Investable Universe |
| To be eligible for Morningstar's indexes, a stock must
be |
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listed on the NYSE, the AMEX, or Nasdaq |
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domiciled in U.S. or its primary stock market activities
are carried out in the U.S. |
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have sufficient historical fundamental data available
to classify its investment style |
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in the top 75% of companies in the investable universe
based on its liquidity score |
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| Stocks are excluded if they |
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have more than 10 non-trading days in the prior quarter |
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are American Depository Receipts and American Depository
Shares, fixed-dividend shares, convertible notes, warrants, rights,
tracking stocks, limited partnerships and holding companies |
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| For a complete description of Morningstar's
index eligibility requirements, please refer to Rulebook. |
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| Constituent Weighting |
| Index constituents are weighted according to their
free float value. The free float is defined as a company's outstanding
shares adjusted for block ownership to reflect only shares available
for investment. The types of block ownership that will be considered
during float adjustment are: |
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Cross ownership (shares that are owned by other companies) |
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Government ownership |
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Private ownership |
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Restricted shares (shares that are not allowed to be
traded during a certain time period) |
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| Institutional investors' holdings (pension funds, mutual
funds and other financial institutions) are not considered block ownership.
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| Determining Cap Cut-Offs |
| Morningstar divides its U.S. Market Index into three
cap indexes by defining each as a percentage of the market cap of
the investable universe. |
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Large Cap
Largest 70% of investable market cap
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Mid Cap
Next 20% of investable market cap
(70th to 90th percentile) |
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Small Cap
Next 7% of investable market cap
(90th to 97th percentile) |
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| Determining a Stock's Style |
| Within each capitalization class, index constituents
are assigned to one of three style orientations—value, growth
or core—based on the stock's overall style score. A stock's value
orientation and growth orientation are measured separately using related
but different variables. |
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| Value Factors |
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Price/projected earnings (50.0%) |
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Price/book (12.5%) |
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Price/sales (12.5%) |
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Price/cash flow (12.5%) |
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Dividend yield (12.5%) |
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| Growth Factors |
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Long-term projected earnings growth (50.0%) |
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Historical earnings growth (12.5%) |
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Sales growth (12.5%) |
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Cash flow growth (12.5%) |
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Book value growth (12.5%) |
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| Style Classification Process |
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| Determine the Value Score |
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Within each cap class, calculate
the five prospective yields (value factors) for each stock. |
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Compute a modified float-weighted percentile
score for each value factor for each stock within each cap class. |
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Calculate a weighted average of the individual
value factor percentile scores for each stock, using the factor
weights above. |
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| Determine the Growth Score |
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Within each cap class, calculate
the five average growth rates (growth factors) for each stock. |
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Compute a modified float-weighted percentile
score for each growth factor for each stock within each cap
class. |
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Calculate a weighted average of the individual
growth factor percentile scores for each stock, using the factor
weights above. |
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| Determine the stock's overall style
score |
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Subtract the value score from the
growth score. |
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If the result is strongly positive, the stock's
style is growth; if the result is strongly negative, the stock
is classified as value. If the value-growth scores are not sufficiently
different, the stock is designated core. |
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Breakpoints for value, core and growth styles
are set so that, over a three-year rolling period, each style
represents one-third of the investable universe within each
cap class. |
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| Stability Buffers |
| Stocks are reclassified in terms of style or capitalization
only if they move sufficiently beyond the break point between styles
(value-core or core-growth break points) or capitalization (large-mid
or mid-small). The range in which a stock movement is permitted without
impacting the classification is called the buffer zone. Short-term
movements of stocks into or within the buffer zones do not result
in index turnover. |
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| Reconstitution |
| Morningstar reconstitutes (adds or removes stocks from)
each index twice annually. |
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| Rebalancing |
| Morningstar rebalances (adjusts constituent weights)
its indexes quarterly. However, immediate rebalancing occurs when
a company's free-float changes by 10% or more or two index constituents
merge, even if change in their free-float shares is less than 10%. |
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