Morningstar XRay Tool

[Pages:47]Morningstar X-Ray Tool

Methodology Guide v2.1

Introduction .................................................................................................................................. 2 Grouping X-Ray's Calculations: Portfolio or NAV Based ............................................................ 3

Portfolio Based Statistics.............................................................................................................. 4 Asset Class Composition.......................................................................................................... 4 Top 10 Country Breakdown ...................................................................................................... 8 Equity Style Exposure............................................................................................................. 10 Fixed-Income Style Exposure ................................................................................................. 13 Equity Sector Breakdown ....................................................................................................... 16 Regional Exposure.................................................................................................................. 19 Top 10 Holdings ..................................................................................................................... 22 Top 10 Underlying Holdings.................................................................................................... 23 Equity Portfolio Statistics ....................................................................................................... 26 Fixed-Income Portfolio Statistics ............................................................................................ 29 Holding Overlap...................................................................................................................... 32

NAV Based Statistics ................................................................................................................. 35 Performance .......................................................................................................................... 35 Investment Growth Graph ...................................................................................................... 38 Risk / Reward Scatter Plot ..................................................................................................... 41 Correlation Matrix .................................................................................................................. 42

Appendix A: Sample X-Ray PDF Report ...................................................................................... 43

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Introduction

The purpose of Morningstar's X-Ray tool is to analyze an investor's portfolio of investment holdings. The X-Ray's principal result is transparency. For instance, with the X-Ray an investor can find out the proportions of total assets that are invested in different sectors, regions, equity styles or countries. The investor can also find out if he or she is indirectly exposed to the same stock in different funds, the amount of assets invested in a particular stock or the portfolio's fundamental ratios. The X-Ray is meant to be used when the investor has at least two holdings for analysis. For single holding analysis, Morningstar's Investment Detail report is more suitable. The following definitions are used extensively in this document:

Investor's Portfolio = The portfolio of an X-Ray user or advisor Holding = A holding in an investor's portfolio. In general, a holding can be any type of security (e.g. open end fund, stock or bond) The X-Ray is available in both HTML and PDF output. These differ slightly in that the HTML version is interactive (allows more detail in various pages) and the PDF version is both, and usually more visually compelling. This document is written to cover all functions in both outputs as there is significant overlap, however, you may see the diagrams and figures differ slightly depending on which is being viewed. The view will be indicated where applicable.

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Grouping X-Ray's Calculations: Portfolio or NAV Based One can think of an X-Ray report as having sections belonging to two groups. The first group contains all sections where the statistics are based on holdings' portfolios. The second group contains all sections where the statistics are based on holdings' NAVs. In an X-Ray report the following sections may appear:

Portfolio Based Asset Class Composition Top 10 Country Breakdown Equity Style Exposure Fixed-Income Style Exposure Equity Sector Weightings Regional Exposure Top 10 Holdings Top 10 Underlying Holdings Equity Portfolio Statistics Fixed-Income Portfolio Statistics Holding Overlap

NAV Based Performance Investment Growth Graph Risk / Reward Scatter Plot Correlation Matrix

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Portfolio Based Statistics

Asset Class Composition The broad asset class allocation gives an impression of how the investor's portfolio is distributed over different asset classes. An example of this can be seen in Figure 1.a. The asset class lineup can also be customized based on the data available for classifying holdings in Morningstar's database.

Figure 1.a

Morningstar distinguishes between the broad asset classes, see below for an example:

Asset class

Description

Cash

Sum of all cash holdings

Equity

Sum of all equity holdings

Bond

Sum of all bond holdings

Property

Sum of all property holdings

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Other Not classified

Sum of all holdings in derivatives and receivables Sum of all holdings that could not be classified in any of the above

Since a holding's exposure to a particular broad asset class can vary and the investor has the possibility to invest and divest in a holding daily, the X-Ray must first calculate the investor's weight in a holding before calculating exposure to an asset class.

Morningstar will calculate both long and short breakdowns for asset allocation. The percent in each asset class is the total long or short market value in that asset class divided by the total market value in the portfolio.

The long percentages will always represent positive numbers and the short percentages will always represent negative numbers. These won't necessarily add up to 100% independently.

If there are no short positions or derivatives in the portfolio, the long asset allocation breakdown will add up to 100%. If there are short positions and these are fully collateralized, the long positions will typically add up to more than 100%.

Net asset allocation is calculated by adding together the long and short position.

The investor's current assets in a fund i at time t is determined by the number of shares and the value of each share. At time t, the value of the investment in fund i is:

hcvit = si * navit

where: si = Number of shares of fund i navit = The latest NAV for fund i

The total value of the investor's combined holdings is:

n

hcvit

i =1

where:

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n

= Number of holdings in the user portfolio

Consequently, the investor's weight in holding i at time t is:

wit =

hcvit

n

hcvit

i =1

Using each holding's weight, one can calculate the investor's cash exposure as follows:

n

ppc = hpci * wit

i =1

where:

ppc = The investor's percentage cash exposure

hpci = Cash percentage in fund i

n

= Number of holdings in investor's portfolio

Using the same methodology, one can calculate the investor's equity, bond, other and "not classified" exposure.

n

ppe = hpei * wit

i =1

n

ppb = hpbi * wit

i =1

n

ppo = hpoi * wit

i =1

n

ppnc = hpnci * wit

i =1

Note that a holding or fund's investment in an asset class is estimated using the fund's portfolio of securities. The portfolio's date might be different from time t, when the X-Ray is produced. Since

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portfolios are normally updated frequently, the X-Ray's broad asset class composition statistics will usually be current in general. Also note that the broad asset class allocation percentages sum to 100%.

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Top 10 Country Breakdown The Top 10 Country Breakdown gives the distribution of the investor's assets across different countries. Morningstar's databases contain all countries. Figure 1.b shows an example of this breakdown:

Figure 1.b

An investor's exposure to a country is determined by how much money is invested in a holding and the amount of money in that holding invested in a particular country's companies. Note that the X-Ray only uses a holding's equity portion when it calculates the breakdown by country. Bond holdings are excluded. An investor might be exposed to a country by being invested in fixed-income securities issued in a particular country. At any time t, the value of an investor's assets in holding i is: hcvit = si * navit where: si = Number of shares of fund i navit = The latest NAV for fund i A holding may or may not be invested in equity / companies. The value of assets in fund i exposed to equity is: hcvit * hpsi where: hpsi = Percent of equity in holding i

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