Methodology Documents

Morningstar has conducted research on active and passive investment strategies and their associated vehicles since 1986.

This paper outlines the key assumptions and details behind our quantitative equity rating methodology.

We believe that a company's intrinsic worth results from the future cash flows it can generate. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic worth--or fair value estimate, in Morningstar terminology.

This document describes the rationale for, and the formulas and procedures used in, calculating the Morningstar Rating for funds (commonly called the “star rating”). This methodology applies to funds receiving a star rating from Morningstar.

This paper outlines the key assumptions and details behind our quantitative equity rating methodology.

Morningstar developed the Morningstar Equity Comparables system to give investors and financial professionals an objective benchmark for comparing companies. Morningstar Equity Comparables is genuinely different to other industry classification schemes. We start from the bottom up with comparable companies, as opposed to the top down with sector definitions. For every pair of companies, we determine how similar they are–anywhere from closely comparable to distantly related based on automated analysis of the companies' own business description. We automatically analyse the text of the business description and work out whether companies are talking about similar things as they describe their businesses. Businesses described in similar terms are comparable.

In this paper, we explore the historical relationship between employee stock ownership in 401(k) plans and subsequent company stock return on both a relative performance and risk-adjusted basis.

A Morningstar analysis of the average industry glidepath shows it will meet most retirees' spending needs, and funds with significantly different asset allocations have delivered similar returns in recent years. Other factors may contribute to these inve

This methodology document addresses the return calculation for fixed-rate and zero-coupon bonds. The methodology does not currently address other types of bonds such as floating-note bonds, mortgage-backed and asset-backed bonds, Treasury Inflation-Prote

ETF managed portfolios are investment strategies that typically have more than 50% of portfolio assets invested in ETFs. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe.

This article addresses the issue of the alleged superiority of risk-factor-based asset allocations over the more traditional asset-class-based asset allocation.

Total portfolio refers to a portfolio with a strategic asset-allocation policy consisting of multiple asset classes implemented with various investment managers. This document outlines several methods of attributing performance, including the classic app

Research that has led to what is known as the "low volatility anomaly" in cross-sectional stocks from a similar universe indicates that volatility is not compensated with a "volatility" premium. We find evidence of a risk premium, but it depends on the d

Morningstar's quantitative ratings are available for more than 28,000 companies in 86 countries that trade on 64 exchanges, allowing investors to obtain a much greater breadth of the independent perspective they know and trust from Morningstar.

The Global Fund Investor Experience report measures the experiences of mutual fund investors in 24 countries in North America, Europe, Asia, and Africa. Morningstar researchers evaluated countries in four categories—regulation & taxation, disclosure, fee

Morningstar has conducted qualitative, analyst-driven research on 529 college-savings plans since 2004 and has transitioned to a new ratings scale. The Morningstar Analyst Rating® for 529 College-Savings Plans is the summary expression of our forward-loo

Recent literature indicates that a liquidity investment style – the process of investing in relatively less liquid stocks within the liquid universe of publicly traded stocks – has led to excess returns relative to size, value, and momentum. We examine w

The Similar Funds tool will generate a list of investments that are similar to a user-specified offering. This methodology is based upon several factors including the category, special criteria, portfolio allocation, and performance of the fund provided.

After-tax returns are measures of fund performance that take into account the taxes a hypothetical investor pays on fund distributions and capital gains. This methodology document addresses Morningstar’s interpretation of the 2001 Securities and Exchange

This article reviews the motivation for multiplying by root 12 and explains why it does not apply to returns. It then shows the derivation of the correct method to help the reader understand why it is in fact correct.

This paper proposes a new methodology to model ETF premiums and, for the first time, present empirical data on the time-series evolution of ETF premiums and discounts.

Morningstar Target-Date Fund Series Ratings and Research Reports are designed to help individual investors, financial advisors, plan sponsors, and other interested fiduciaries make informed decisions when evaluating a series of target-date funds. Target-

This methodology document addresses the target-date fund series rating and research reports methodology. Morningstar Target-Date Fund Series Ratings and Research Reports are designed to help individual investors, financial advisors, plan sponsors, and ot

In this paper we introduce a model that takes into account current bond yields and allows them to “drift” 3 toward a higher value during retirement using an autoregressive model based primarily on historical relationships between asset classes. This appr

Social Security (SS) is the largest source of retirement income for most Americans. This paper provides the reader with an overview of the SS retirement system and offers insight into key factors that should be considered when determining when to begin r

The rating methodology described herein applies to the new issue of a resecuritization of one or more U.S. nonagency RMBS securities. In a typical Morningstar rated resecuritization, one or more securities are pledged to a trust as eligible collateral. A