Morningstar Refreshing Iconic Style Box: Allan Roth

Morningstar Refreshing Iconic Style Box: Allan Roth

Morningstar's decision follows Roth column questioning the usefulness of the box in current iteration.

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Reviewed by: etf.com Staff
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Edited by: Ron Day

Morningstar recently sent out a communication to clients that it will update the methodology for the Morningstar Style Box starting with month-end August 2024 portfolios. They shared that communication with me on background.  I think this is terrific news.  

The communication read, in part:  

"Overall, the structure and output for the Morningstar Style Box will remain the same. Due to the calculation change, clients will see a shift in style scores starting with month-end August 2024 portfolios and, in some cases, category assignments as of month-end November 2024, most notably for large-cap US funds.

"As such, Morningstar products and data feeds that contain the Morningstar Style Box and its associated style score data points will reflect these updated values and placements effective with month-end August 2024 portfolios."

Style Box Adrift

Morningstar made me aware that these changes were coming. Recently, I wrote a piece that the trademarked Morningstar style box was adrift and why that was a problem. That’s because many (including me) use it for benchmarking a portfolio manager’s style and see how it was changing over time. 

But it’s the style box that was drifting so much that a total stock index fund was approaching a large-cap growth style. The drift can be seen here comparing the original style box to a recent style box allocation of a market capitalization weighted total stock market fund.  

Chart 1

While I’ve been pointing this out to Morningstar for some time, I only learned recently that they would soon have an announcement of a change in the methodology. I was aware that they have been working on this issue for some time, and was thrilled to hear they are addressing it along with a timetable for those changes. Then we can be sure that a drift in a portfolio is coming from the manager rather than the style box itself, or both. We can also make sure we are comparing funds of similar styles.

Morningstar went into more detail in their FAQ sheet posted on their client facing website. Of note is that the large cap style boxes (for both the U.S. and Australia) will see the largest shifts. That makes a lot of sense as you can see that the large cap growth is now more than 2.5 times larger than large cap value. The original style box shown above had each of the three large-cap style boxes the same.  

Morningstar stated, “When the methodology change goes live for August month-end portfolios, the Morningstar Style Box calculation will have the update applied automatically. The values will flow to all Morningstar products containing the Style Box data.” Thus, we will see another shift from the current style box allocations for portfolios and funds. Morningstar states that it will not be restating prior style box scores such as where a fund or portfolio is today.  

Finally, Morningstar notes that some funds will change in their classifications within the style box. Morningstar will be reviewing the portfolio data and plans to update the category assignments for month-end November 2024. If a fund’s category changes, Morningstar will notify the fund managers before the change takes place and give the managers time to review and appeal, if deemed necessary.

Usefulness Restored

In my previous piece, I stated the style box was still useful but not as valuable as it once was. I also pointed out that it was far easier to identify a problem than it was to fix it. So I view these changes as yet another example of Morningstar’s dedication to helping investors, both professionals and consumers.  

I have high confidence that these changes will restore the full usefulness of the Morningstar style box.  

Allan Roth is founder of Wealth Logic, an hourly based financial planning and investment advisory firm. He also benchmarks portfolio performance for foundations and other business concerns. Roth's website is www.DareToBeDull.com. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter