Morningstar fires research salvo

Morningstar has fired its latest salvo in the battle among researchers for the hearts and minds of advisers and investors with the launch of a new portfolio construction tool.

The Morningstar global style box will be rolled out in Australia and New Zealand this week — the first country to launch the concept, ahead of Morningstar’s massive US presence and its operations in Europe and Asia.

Morningstar Australia managing director Graham Rich reckons the launch of the global style box in Australia ranks alongside the introduction of star ratings in its significance to the Australian market.

Rich says Morningstar pioneered star ratings in Australia, only to be followed by research houses Assirt and InvestorWeb. However, he says the competitors will not find the style box concept as easy to copy as Morningstar has trademarked the name and the concept relies on detailed research of equities and each fund manager’s holding of equities.

Rich says the style box complements the star rating system “much like bacon and eggs”.

“The star rating system provides advisers and investors with a way to measure the quality of each individual fund, but they say nothing about how they will mix with other funds. The style box adds the portfolio construction element to the research,” he says.

Morningstar has researched stocks in major stock markets around the world and classified them on the basis of market capitalisation (small, mid or large cap) and whether the stock is a value or growth stock based on four ratios, including price to book. In the case of global funds it will then analyse the weighting given to different stocks in different regions.

Morningstar then gathers the stock holdings of each fund to assess the fund’s style based on criteria developed by Morningstar. The style box can then be used to evaluate whether a mix of funds is delivering true diversification or whether a fund manager is shifting style.

Development of the style box is the culmination of a number of developments within the Morningstar group around the world. In the past three months, Morningstar has opened offices in London, Italy, Spain, Scandinavia, Hong Kong and Korea to give the group presence in all major markets.

Morningstar has been providing the style box system in the US for a number of years but it has been restricted to funds offered in the US market. The group’s new offices provide the reach to research stocks in all major markets.

Morningstar’s Australian and New Zealand operations also recently added research on equities to its research armoury that includes quantitative and qualitative research on Australia’s 4000 managed funds.

Rich reckons the style box concept will take about two years before it is well accepted as the star rating system. It will initially be used as a part of master trust offerings and research reports before being offered as a stand-alone software tool for advisers later this year at a cost of $4000 per annum.