Upcoming Update to the Morningstar Style Box™ Methodology

On Aug. 31, 2024, we are launching an update to the Morningstar Equity Style Box methodology. The changes will address the impact of an unusual market dynamic currently affecting the US equity market (and, to a lesser degree, other regions), which has—most notably—led to a growth bias in the style scores for the US large-cap equity universe. The changes will ensure that each style universe, considered as its own portfolio, scores exactly at the midpoint of the value-growth spectrum. This will enhance investors’ ability to make clear judgments about whether a fund or portfolio exhibits a value, blend, or growth style irrespective of its market capitalization or regional exposures.

Since its introduction in 1992, one of the key objectives of the equity style box is to provide a descriptive framework that accurately portrays a fund’s size and style scores relative to its peers, independent of market conditions. As a result, investors have had a simple yet powerful tool to classify and compare portfolios.

Since our last updates in late 2020, continued enhancements to the calculation methodology are necessary to ensure that the central tendency of each universe’s scores is neutral. Going forward, in the formula that comprises the final step of our style score calculation, instead of equal weighting our means and standard deviations, we will update both to use market-cap weighting. The introduction of this refinement promises a more standardized depiction of fund style scores. The changes will ensure that each universe, considered as its own portfolio, scores exactly at the midpoint of the value-growth spectrum. For those who want to dig into the details, additional information can be found in this white paper by the Morningstar Portfolio Methodology team.

Overall, this change will enhance investors’ ability to make clear judgments about whether a fund or portfolio exhibits a value, blend, or growth style, irrespective of its market capitalization or regional exposures.

While most funds will not shift Morningstar Categories, we do anticipate some future movement in the style-based categories whose funds invest in large-cap stocks in the US, Europe, and Australia. Based on preliminary test data, there could be a change of approximately 10% in category assignments in these areas. These reclassifications are anticipated to occur three months after this methodology update.

Additional information for professional and institutional users can be found in this FAQ.