- Small Value
- Small Blend
- Small Growth
- Medium Value
- Medium Blend
- Medium Growth
- Large Value
- Large Growth
- Large Blend
Market Capitalization
Morningstar measures a fund's market capitalization (large, medium, and small)
by studying the size of the companies that the fund is investing in. The
top 5% of the 5,000 largest stocks are classified as large cap, the next 15% are
considered medium cap and the remaining 80% are considered small cap.
Valuation
Using P/E (price to earnings) and P/B ratios (price/book) of the companies a
fund invests in, Morningstar analyzes the data to determine if a fund is a
value, growth, or blend (meaning a mixture of the two) fund.
Usage of the
Style Box
There are many different ways to use the style box to make your asset
allocation selection. Investment professionals have different
recommendations on how to use the style box. Some will recommend you
purchase a fund for each category, others will recommend a single medium blend
fund.
One strategy that I might suggest is going for the corners (which also happens to be a good strategy for tic-tac-toe). By going for the corners, you are making sure that you portfolio is well diversified. When you use blends and mid-caps, you have less of a grip on what allocation you are ending up with. A small blend manager may choose to buy a lot of growth stocks one year and a lot of value another.
Another interesting feature of Morningstar's site is that it displays the past few years worth of style boxes. This is a good way to see how often the fund manager changes their investment selection preference. If you are hiring a manager for his picking skills, than a change in selection may not be a problem. But if you are purchasing the fund to fill a certain need in your portfolio, then you want the fund to be consistently buying the same kinds of stocks.
I only covered the equity style box in this article. Morningstar also offers style boxes for bond funds, international funds, and hybrids. The style box is a great tool that every mutual fund investor should use to study their current holdings and make choices about their future holdings.
