Morningstar to drill down to stock holdings

Research houseMorningstarwill expose what funds really own at a stock level, rather than what the fund’s name or style label suggests, with the release, at the end of this month, of a new holdings-based style analysis.

The analysis will be introduced for Australian equity funds into the group’s Adviser Workstation software with a planned rollout for international equity funds analysis in the second half of this year.

The new tool will be based on the group’s existing Style Box grid, but chief executive Scott Cooley says it will adopt an enhanced methodology using 10 different forward-looking and historical measures to determine a manager’s style and whether stocks held are consistent with that style.

Morningstar’s Style Box is a nine-square grid with three stock investment styles for small, mid and large funds down one side, and style categories of value, growth and blend, funds that mix growth and value, down the other.

“The new analysis process will allow us to compare the size and scale of stock holdings across funds and ensure a type of ‘truth in advertising’ regarding where they stand. It can then be used by financial planners to better construct portfolios with complementary holdings,” Cooley says.

Under the holding based analysis stocks are attributed with a style then rolled up to determine the overall investment style of the fund.

By plotting all of a fund’s stocks on the stock style grid, the range of stock styles included in the fund become apparent, with an asset-weighted average of the stocks’ net value/growth scores determining the fund’s overall style.

This evaluation will then be further linked to overall fund research, resulting in the ability to create portfolios based on underlying stock holdings.

Morningstar says that advisers can combine the Style Box plots of several funds to get an accurate picture of the resulting portfolio. Fund managers can also assess how well their funds complement each other, and how stock selections affect investment style.

Further advanced tools, including a graphical feature plotting each stock in the fund’s portfolio inside the Style Box will also be launched in the second half of this year.