Dear Morningstar Clients,
We wish all of you a very happy and safe Thanksgiving holiday.
This e-mail contains Morningstar Data Release Notes for November 2003. As always, we invite your comments and questions on our communications, products and services. Please contact any member of your account team. Thank you.
Your Morningstar Team
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Morningstar(R) Data Release Notes - November 2003
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*Fund Category Review
Thank you to all who participated in our recent fund category review. On December 3, you may view new category assignments and the resulting Morningstar Rating on our websites: DataLab, Advisor Workstation or Morningstar.com.
*Upcoming Data and Methodology Changes
As announced last month, Morningstar is committed to ongoing improvement in our processes and our data. Our research department regularly scrutinizes various data, and makes improvements they think will add value for investors. Listed below are several improvements that will take place in the first quarter of 2004.
*Bond Sectors
On February 29, 2004, Morningstar will introduce a new sector breakdown for bond funds. This new layout will offer more detail about the various types of assets held by domestic bond funds. It includes the following sectors:
1 US Treasury
2 Agency Debt
3 Mortgage Pass-thru
4 Mortgage CMO
5 Mortgage ARM
6 US Corporate
7 Asset-backed
8 Foreign Corporate
9 Foreign Govt
10 Municipal
11 Convertible
12 Cash
The sector breakdown is expressed as a percentage of the fund's total assets in bonds and cash. It will be provided for all domestic taxable funds (including the categories Moderate Allocation, Conservative Allocation, Bank Loan, High Yield, and Multisector, but excluding international, convertible, and municipal bond funds). This new data will replace the current government bond sector breakdown (US Treasury, GNMA, FNMA, FHLMC, CMO, ARM, Other), which was fairly limited in scope. The new sector breakdown will give investors more detail about how certain funds are invested.
*Share Class Consolidation
Effective February 29, 2004 we are consolidating share classes into the 14 categories listed below. We will continue to reflect the registered name of the share class, for example, ABC Mgmt. Co. Aggressive Growth Intsl. Serv. Class II (abbreviations may be necessary), but will group it with other institutional share classes using the codes below. If you need the descriptions for any of the codes listed, please contact your account team.
1 A
2 B
3 C
4 Inst
5 D
6 Adv
7 Inv
8 Retirement
9 S
10 T
11 M
12 N
13 Other
14 "No Load"
Note: To designate the oldest distinct share class in our database, the system looks for the oldest inception date. If a fund has several share classes with that same inception date, the system will use the sequence of the list above to determine the oldest share class. For example, if share classes B, C and Retirement share an inception date, B will be designated �oldest distinct share class.�
*Methodology Changes on Investment Profile(TM) pages As announced last month, several improvements will be implemented on Investment Profile pages with January deliveries of December 31, 2003 data. These include consolidation of prospectus objectives, replacement of legacy data with enhanced Value and Growth portfolio measures, and fund-level calculations of various statistics based on trailing 12-month financial data rather than fiscal year-end data. Please see �Methodology Changes� in the recap below for further details on these enhancements.
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Recap of Previous Announcements
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*Morningstar Rating(TM) for Separate Accounts In October, Morningstar introduced the Morningstar Rating for separate accounts, which is based on our proprietary risk-adjusted return methodology. The new Rating gives professional investors a tool to help identify separate accounts that are worthy of further research and to conduct peer group analysis based on the Morningstar Categories. We also introduced the Morningstar Flexibility Measure(SM) for separate accounts, "flex measure," a proprietary statistic that helps investors measure the level of customization that each separate account offers. These new tools for separate accounts are now available in DataLab, and will appear in the November release of Principia(R) Separate Accounts, and in Advisor Workstation(SM) by year-end. Data licenses and Profile pages are also available. If you would like more information or a copy of our press release or fact sheet, please contact your Morningstar representative.
*Methodology Changes
Listed below are several enhancements that were implemented during October month-end processing and are now available in the Morningstar database.
*Prospectus Objective Consolidation
Morningstar has consolidated our prospectus objectives. The codes remain the same, field length remains 32 characters, and the record layout will not change. An Excel file with complete details is available; please contact your account team if you would like a copy.
*Change to Portfolio Measures
Morningstar has implemented methodology changes to some of the equity portfolio statistics. Morningstar replaced the last legacy price ratios and growth rates with the enhanced Value and Growth portfolio measures introduced in May 2002 with the new Morningstar style model. The number of data points and the record layout and field length are unchanged.
Morningstar chose the calculations from the 10-factor style model rather than other measures of price ratios or growth because the data is more relevant and timely. For example, Morningstar used to report price ratios for funds that were based on the underlying stocks' performance over the trailing twelve-month period (for earnings, book value, sales, etc.). The new price ratios are based on projections rather than historical data. A forward-looking measure is critical to any price ratio, because the market does not trade on history as much as it trades on future projections for each stock.
Similarly, the growth rates from the 10-factor style model are more representative of each stock's growth rate, because these measures give more weight to more recent growth. Morningstar measures growth as the average of each periodic growth rate over a span of five years (e.g. y5 to y1, y4 to y1, y3 to y1, etc.). This puts more weight on the stock's recent growth compared to a simple annualized growth rate that treats each year equally.
We will no longer be supporting P/E for foreign funds.
Lastly, Morningstar will now calculate fund-level averages for return-on-assets, return-on-equity, debt-to-cash, and net margin based on stocks' trailing 12-month financial data rather than fiscal year-end data. This ensures that the underlying stock data for these calculations will be more current, because it will be updated quarterly, rather than yearly. Therefore, you may notice more variance in the fund averages from month to month as this enhancement means we are able to provide you with fresher data.
*Tax Rate Changes
The Jobs and Growth Tax Relief Reconciliation Act of 2003 calls for different tax treatments for qualified dividends and new tax rates for income, dividends, and capital gains. As previously communicated, effective November 30, Morningstar will begin using the new tax rates and qualified dividends in our after-tax calculations. The November 30 launch will also include new quarter-end returns (up through September 30) that are based on the new tax rates. If you would like additional details, please ask your account team for a copy of our explanatory document and methodology paper on after-tax returns.
*Tax Rate Change and Data Submission
In order to ensure that your funds' after-tax returns are shown correctly in Morningstar products, please be sure that your operations team submits detailed distribution data to Morningstar using the new performance file template we supplied in June. If you would like another copy of the template, please contact your account team.
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