Morningstar Hits Big Board With Style

July 04, 2004

The Morningstar U.S. Market Index covers approximately 97% of the capitalization of the U.S. stock market.

Reaching out to advisors and individual investors

With its highly recognizable brand name, databases, and vaunted style boxes, Morningstar seems like a natural index provider.

"Many advisors follow Morningstar's research and determine a target asset allocation for their clients based on the Morningstar Style Box," said Lee Kranefuss, CEO of BGI's intermediary business.

"Our style box methodology is a very popular way of looking at the stock universe with financial advisors and individual investors - now they will have actual investments based on the style boxes," said Joe Mansueto, founder, chairman, and CEO of Morningtar.

So far institutional investors and sophisticated traders have been the primary users of ETFs, but Vanguard, BGI, and others have eyed the financial advisor and retail investor market.

"The opportunity to bring the iShares brand together with the Morningstar brand we think will appeal to our existing clients, as well as to a wider range of investors who may not have looked at us or ETFs before," said J. Parsons, head of sales for BGI's Intermediary Business.

A question of style

In the indexing industry, the trend is toward higher complexity when it comes to structuring style index methodology.

"We believe the Morningstar indexes offer a higher level of style purity, partly because we use a 10-factor style methodology," said Mansueto. The ten factors are:

Value Factors
• Price/projected earnings
• Price/book
• Price/sales
• Price/cash flow
• Dividend yield

Growth Factors
• Long-term projected earnings growth
• Historical earnings growth
• Sales growth
• Cash flow growth
• Book value growth

"Unlike some indexes, a stock cannot be in multiple indexes," said Mansueto. "We also have a 'core' category for stocks that are not strong value or growth. In some existing indexes for example, stocks may end up in the growth camp simply because they're not value, or vice versa."

With back histories to 1992, the Morningstar Indexes Web site has more information on the index methodology, returns, and constituents.

"There are no gaps or overlaps in our indexes, so they work nicely as portfolio building blocks," said Mansueto.

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