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Margaret Kirch Cohenmargaret.cohen@morningstar.com
Morningstar Announces Fund Category Classification Changes

CHICAGO, May 05, 2003 – Beginning in June, Morningstar will implement several changes within its proprietary mutual fund category classification structure. The changes, part of a series of enhancements to the company's investment methodology, will help investors better differentiate between the many types of funds that are now available. Morningstar is discontinuing one category, adding 11 new categories, and changing the names and content of eight others.  

Don Phillips, Morningstar managing director, said, "We introduced the Morningstar Categories in the mid-1990s to help investors make meaningful comparisons between funds that may seem similar but that have very different investing styles. For example, many funds claim to be growth oriented. However, some managers pursue growth by investing in blue-chip U.S. companies, while others pursue growth by investing in small international companies. A fund's Morningstar category classification reflects its long-term investment style, and is a natural starting point for determining where a fund may fit within an investor's portfolio."

Phillips added, "Our analyst team recently conducted a thorough study of our existing categories to determine which funds' investment styles differed from their peers, and what trends were emerging in the fund marketplace. As a result of those studies, we've fine-tuned the categories to ensure they reflect the current investing climate." 

Key Changes

Discontinued Category

The Domestic Hybrid category – formerly defined as funds that had at least 20 percent but no more than 70 percent of assets in stocks and at least 10 percent in bonds – will now be divided into two new categories: Conservative Allocation and Moderate Allocation.

New Categories

  • Conservative Allocation: funds that invest in both stocks and bonds and maintain a relatively smaller position in stocks. The funds typically have 20 percent to 50 percent of assets in equities and 50 percent to 80 percent of assets in fixed income and cash. 
  • Moderate Allocation: funds that invest in both stocks and bonds and maintain a higher position in stocks. The funds typically have 50 percent to 70 percent of assets in equities and the remainder in fixed income and cash. 
  • Bear Market: funds that use short positions and derivatives in order to profit from stocks that drop in price. Because these funds have extensive holdings in shorts or puts, their returns generally move in the opposite direction of the benchmark index. 
  • Bank Loan: funds that invest primarily in floating-rate bank loans instead of bonds. In exchange for their credit risk, they offer high interest payments that typically float above a common short-term benchmark.  
  • High Yield Muni: funds that invest at least 50 percent of assets in high-income municipal securities that are not rated or that are rated by a major rating agency at the level of BBB (considered speculative in the municipal industry) or below.
  • State-specific munis: municipal bond funds that primarily invest in one specific state. These funds must have at least 80 percent of assets invested in municipal bonds from that state. Each state-specific muni category includes long, intermediate, and short duration bond funds. 

Muni Florida
Muni Massachusetts
Muni Minnesota
Muni New Jersey
Muni Ohio
Muni Pennsylvania

Content and Name Changes

  • State-specific municipal bond funds are most appropriate for investors who reside in that state and can take advantage of the state tax benefits. Therefore, it is most useful if these funds are grouped by state rather than by duration (short, intermediate, and long). All single-state municipal bond funds will be removed from the Muni Short category, which contains both national-focused and state-focused funds. The single-state, short-duration funds will either be assigned to a general single-state category or to a state-specific category. 
  • The current single-state categories will be renamed and will include both intermediate and short duration single-state funds. For example:

Current Name                                    New Name
Muni Single State Interm                     Muni Single State Interm/Short
Muni New York Interm                      Muni New York Interm/Short
Muni California Interm                        Muni California Interm/Short

  • Because single-state funds will be removed from the Muni Short category, that category will be renamed Muni National Short.

Content Changes

  • Funds in the Foreign Stock category (funds that invest primarily in non-U.S. stocks) may now hold up to 20 percent of assets in the United States. The World Stock category (funds that invest in both U.S. and non-U.S. securities) will now contain all funds that invest at least 20 percent of assets in the United States. Previously, funds with more than 10 percent of assets in the United States were classified as World Stock.    
  • Multisector Bond funds invest in a variety of government, corporate, high-yield, and international bonds. While Morningstar fund analysts have always used credit quality as a factor to help classify these funds, now they are creating a more exact quantitative framework for this category. Funds that invest 35 percent to 65 percent of assets in bonds that are not rated or that are rated by a major rating agency at the level of BB and below will be classified in the Multisector Bond category.  

Name Changes

  • Two categories will be renamed for consistency purposes:

Current Name                                              New Name
International Hybrid                                      World Allocation
International Bond                                        World Bond

The Morningstar Categories were introduced in 1996 to classify a fund's investment style based on how it actually invests. Rather than assign a category to a fund 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, and launched the Morningstar Ownership Zones in March 2003.

For more information about the category changes, please read the accompanying fact sheet.

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

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