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Morningstar Mutual Fund Style Box

Generally, the major purpose of a style box is to assist investors in the construction of their mutual fund investment strategies. It was first created by Morningstar, which represents one of the richest data sources for mutual fund information and opportunities. Morningstar's style box includes 9 categories according to which mutual funds can be classified. They are as follows:

  1. Small Value
  2. Small Blend
  3. Small Growth
  4. Medium Value
  5. Medium Blend
  6. Medium Growth
  7. Large Value
  8. Large Growth
  9. Large Blend

Morningstar incorporates market capitalization and valuation in its investment opportunities analysis.

Market capitalization can be large, medium or small. It is implemented by Morningstar for the purpose of examination of the size of the companies in which the mutual fund makes the investments. As a result:

  • Large cap stocks are classified as the top 5% of the 5,000 largest stocks.
  • Medium cap stocks are classified as the next 15% of the 5,000 largest stocks.
  • Small cap stocks are classified as the remaining 80% of the 5,000 largest stocks.

Morningstar implements valuation in order to identify a fund as value, growth or blend. A blend fund represents a combination of a value and growth funds. The valuation is done through price to earnings (P/E) and price/book (P/B) that companies, in which the mutual fund puts money, realize.

Morningstar Style Box Application

The opinions over the exact implementation of the style box differ from financial expert to financial expert. This is caused by the fact that the style box itself represents many alternative possibilities of application. As a result sometimes it is better to invest in a single medium blend fund, whereas other specialists recommend the investment in funds representative of each category.

The investment in stocks allocated by the corners of the style box will provide you with a greater diversification of your mutual fund portfolio. The purchase of blends and mid-caps leads to a less reach as regards to allocation of the money you invest. Additionally, the purchase of many growth stocks in one year and of many value stocks the other is a preferred mutual fund investment strategy by many small blend managers.

Additional service that is offered by Morningstar is the possibility of viewing the values of the style box from previous years. This service provides a useful tool for observing the mutual fund manager's investment activity and preferences. Depending on your investment objectives you can use the style box to choose from a manager who is investment change oriented and the one that maintains a stable investment picking. If you prefer the type of manager that frequently change their investment targets, a style box that identifies this will direct you to the right mutual fund. On the other hand, you will direct your attention to a fund manager with consistent investment targets if you have purchased the mutual fund with the intention of satisfying a particular niche in your portfolio.

The herein presented style box is an equity one. In addition to it, Morningstar has created bond style boxes, international style boxes and hybrid style boxes. Finally, the examination of your current investment holdings and the decision on the future investment strategy is greatly facilitated by the style box.

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