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Margaret Kirch Cohenmargaret.cohen@morningstar.com
Morningstar Divides Foreign-Stock Mutual Fund Category into Five Separate Categories

CHICAGO, Sep 25, 2003 – Morningstar, Inc., the leading provider of investment research, is dividing its foreign-stock mutual-fund category into five new categories: foreign large value, foreign large blend, foreign large growth, foreign small/mid-cap value, and foreign small/mid-cap growth. The new Morningstar categories will be implemented in all of the company's products beginning Friday, Oct. 3, and will affect open-end mutual funds, closed-end funds, exchange-traded funds, variable annuities, and separate accounts.  

Foreign-stock mutual funds are those that invest in a diversified portfolio of international stocks, have minimal exposure to U.S. securities, and do not invest exclusively in a particular region. World-stock, emerging-markets, and region-specific funds will not be affected by this change.

Don Phillips, Morningstar managing director, said, "Previously, we grouped all foreign-stock funds in one category. Now, by separating them into five distinct categories by similar investment style and size, we can more effectively help investors understand the differences between the funds. We believe this new structure, which matches closely to our domestic-stock category structure, is better designed for choosing funds and building portfolios." 

Phillips added, "For example, American Funds EuroPacific Growth Fund owns a variety of large, well-known foreign stocks like Unilever and Nestle. First Eagle Overseas Fund focuses on small- and mid-cap equities, and its strict value approach provides exposure to out-of-favor stocks. Both are foreign-stock funds and either may make a good choice, but one is a large-blend fund and the other is a small/mid-cap value fund. Each brings different types and levels of risk to an investor's portfolio. Our new fund categories will help make these distinctions apparent to investors."

New Foreign-Stock Fund Categories
Most foreign-stock funds divide their assets among a dozen or more developed markets, including Japan, Britain, France, and Germany. These funds typically have less than 50 percent of assets invested in emerging markets and less than 20 percent of assets invested in U.S. stocks.

Morningstar defines as large cap any fund that invests in foreign stocks with a market capitalization greater than U.S. $5 billion. Small- and mid-cap funds are those that invest in foreign stocks with a market capitalization less than U.S. $5 billion.

  • Foreign Large Value: Funds that invest most of their assets in large, international stocks that are value-oriented (based on low price/book and price/cash flow ratios, relative to the MSCI EAFE Index). 
  • Foreign Large Blend: Funds that invest in a variety of large, international stocks where neither growth nor value characteristics predominate.   
  • Foreign Large Growth: Funds that invest most of their assets in large, international stocks that are growth-oriented (based on high price/book and price/cash flow ratios, relative to the MSCI EAFE Index).   
  • Foreign Small/Mid-Cap Value: Funds that invest most of their assets in small- and mid-sized international stocks that are value-oriented (based on low price/book and price/cash flow ratios, relative to the MSCI EAFE Index).   
  • Foreign Small/Mid-Cap Growth: Funds that invest most of their assets in small- and mid-sized international stocks that are growth-oriented (based on high price/book and price/cash flow ratios, relative to the MSCI EAFE Index). 

The Morningstar categories were introduced in 1996 to classify a fund's investment style based on how the fund actually invests. Rather than assign a fund to a category based on the objective stated in its prospectus, Morningstar analyzes the fund's underlying holdings.

Funds are placed in a given category based on their average portfolio statistics during the past three years. If the fund is new, Morningstar estimates where it will fall based on the information that is available. When necessary, Morningstar may change a category assignment based on recent changes to the portfolio.

The new categories are part of a series of enhancements and additions to the company's proprietary research methodology. Morningstar introduced its new investment Style BoxSM methodology in May 2002, implemented the new Morningstar RatingTM for mutual funds in June 2002, released the new Morningstar industry sector classifications in September 2002, launched the Morningstar® Ownership ZonesSM in March 2003, and implemented several domestic-stock and bond fund category changes in June 2003.

About Morningstar, Inc. 
Chicago-based Morningstar, Inc. is a global investment research firm, offering an extensive line of print, software, and Web-based products and services for individuals, financial advisors, and institutions.  The company is a trusted source for investment information, data, and analysis of stocks, mutual funds, exchange-traded funds, closed-end funds, separate accounts, variable annuity/life subaccounts, and 529 plans.

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