Morningstar redefines growth/value style box criteria

[NickL]

Morningstar style box for VTI (as an example) was concentrated in large growth (35%+), and has been adjusted to approx half growth half value.

Moving the goal posts to accommodate Mag7, seems a little suspect.

I’m guessing there are some folks with a value tilt trying to achieve a 50/50 split who will be thrown off by this.

https://www.morningstar.com/whats-new/u ... ethodology

Nick

[dcabler]

Morningstar style box for VTI (as an example) was concentrated in large growth (35%+), and has been adjusted to approx half growth half value.

Moving the goal posts to accommodate Mag7, seems a little suspect.

I’m guessing there are some folks with a value tilt trying to achieve a 50/50 split who will be thrown off by this.

https://www.morningstar.com/whats-new/u ... ethodology

Nick

This is nowhere near the first time they've done this.

I wouldn't use their definitions to determine tilts.

Cheers

[Beensabu]

There was a long thread on this not too terribly far back.

viewtopic.php?t=436120

It came down to: The market cannot be tilted, because it is the market, and they are recalibrating the style box so that market cap weighting is "style neutral" when that wasn't the case before.

[sycamore]

There was a long thread on this not too terribly far back.

Was it this: Total Market vs Growth vs Value?

It came down to: The market cannot be tilted, because it is the market, so they are recalibrating the style box to the current market rather than remaining calibrated to a market of the past.

^^ good summary.

[Beensabu]

There was a long thread on this not too terribly far back.

Was it this: Total Market vs Growth vs Value?

Yes! Just updated my post.

It came down to: The market cannot be tilted, because it is the market, so they are recalibrating the style box to the current market rather than remaining calibrated to a market of the past.

^^ good summary.

I edited that too lol. I think it's more good now.

[rkhusky]

Agrees with factor analysis - the market has size and value loadings of zero.

[nedsaid]

I wish Morningstar wouldn't do this but it is what it is. Previously, showing the Morningstar dot in the Large Core box almost touching the Large Growth box does accurately show how the Magnificent Seven, FANG, FAANG, MAMAA, FAANG + Microsoft + Tesla, whatever distorts the broad S&P 500 and Total Stock Market Indexes. It shows how the market itself leans towards Large Growth. Now rejiggering things so that the Morningstar dot shows right in the middle of the Large Core box will cause naive investors to believe that things have changed in the market. I wish Morningstar had left well enough
alone but there is nothing I can do about it.

by dcabler » Tue Sep 24, 2024 5:36 pm

This is nowhere near the first time they've done this.

I wouldn't use their definitions to determine tilts.

Cheers

I agree with dcabler's observation above.

[nisiprius]

If you believe in the existence and importance of the momentum and quality factors, then they need to update their 3x3 style boxes to a 3x3x3x3 = 81-cell style hypercube.

And meanwhile, there are thirty stocks that are in both the Vanguard Growth and Value index funds.



And the last time I checked, there were 23 foreign companies with stocks in the S&P 500. (Schlumberger is domiciled in Curaçao, etc.)

[nedsaid]

If you believe in the existence and importance of the momentum and quality factors, then they need to update their 3x3 style boxes to a 3x3x3x3 = 81-cell style hypercube.

Nedsaid thinks in checkers, experts think in chess, Nisiprius as always thinks in three dimensional chess. Well played.

[nedsaid]

I just got zinged pretty good. Groucho (Vineviz) was awfully good at it but this Nisiprius guy is Vineviz cubed or Vineviz to the 3rd power. At least I am smart enough to realize this. Touche.

Nisiprius just edited his post and took the zinger to a new level with a chart. Man, this guy is good. Vineviz wasn't that subtle.

[nisiprius]

Believe me, no zinging intended. Sorry.

My point is just that nobody should take these classifications too seriously; they all contain arbitrary and subjective elements.

From the moment they started discovering all those new factors I wondered what Morningstar was going to do about it in their style diagrams and category designations. And the answer is: nothing. They don't have a "US quality small value" category.

[nedsaid]

Believe me, no zinging intended. Sorry.

My point is just that nobody should take these classifications too seriously; they all contain arbitrary and subjective elements.

Nedsaid likes to have fun on this forum. Not sure it is allowed here but I do it anyways. Haven't been in Boglehead jail yet so I guess I am okay. The worst that happens is that I get shushed.

Nothing to be sorry about, you did a great job illustrating a point. I always enjoy the discussion. Thanks for posting.

Edit: Want to make it clear that Nisiprius has been nothing but gentlemanly in his posts. I have always enjoyed our interactions here on the forum.

[nedsaid]

Believe me, no zinging intended. Sorry.

My point is just that nobody should take these classifications too seriously; they all contain arbitrary and subjective elements.

From the moment they started discovering all those new factors I wondered what Morningstar was going to do about it in their style diagrams and category designations. And the answer is: nothing. They don't have a "US quality small value" category.

Great point. Another thing you have brought up in other posts is not to get obsessed with precision and fine tuning a portfolio. It is all based upon imperfect tools, imperfect data, and arbitrary categories. I forget the exact term you used, the idea is that approximations are good enough and no one knows what the optimal portfolio for the future will be. We are back to educated guesses. One mark of a good thinker is that he or she attracts imitators, speaking for myself I have shamelessly copied you.

I have also admitted to swagging (SWAG is scientific wild ass guess) and eyeballing, I don't even pretend that my investing approach is precise. My approach to building a portfolio is like a scratch cook preparing a meal, a bit of this and a dash of that and making substitutions when I can't get the fancy ingredients. I also admit that my tastes aren't all that refined, not refined enough to be a factor snob or even an index snob. Eh, good enough, close enough. I even tilt with the simpler and cheaper Style Index funds, I have not yet owned an Avantis or a DFA fund. When it comes to wine, I know there is white wine, red wine, and dessert wine and that is the extent of my knowledge. I told you my tastes are lowbrow, my idea of great entertainment is Battlebots, watching robots smack the heck out of each other, I get really excited when one of the robots catches fire.

Another point is that definitions are arbitrary in themselves and vary depending upon who is speaking. Larry Swedroe uses a 5 Factor model in his writings but they are somewhat different than the Fama-French factors. We can't even agree upon which factors to put into a 5 Factor model.

So yes, point well made. I appreciate you making things so clear. I was just having fun.

[Beensabu]

If you believe in the existence and importance of the momentum and quality factors, then they need to update their 3x3 style boxes to a 3x3x3x3 = 81-cell style hypercube.

Nedsaid thinks in checkers, experts think in chess, Nisiprius as always thinks in three dimensional chess. Well played.

Four dimensional Connect 4.

[sycamore]

...
Moving the goal posts to accommodate Mag7, seems a little suspect.

I'm curious why it's a little suspect?

I imagine everyone who's done analysis of data that changes over time has had to deal with the question of "what's the reference point?" And the related question: "how often do we reset the reference point?"

It's not Morningstar that has to answer those questions. All the index providers do too. S&P, MSCI, Dow Jones, Russell, CRSP.

Presumably all the "data heads" in the industry and academia get together and discuss and debate this sort of thing. I'm not in the industry so I don't know

I’m guessing there are some folks with a value tilt trying to achieve a 50/50 split who will be thrown off by this.

For sure

I happened to buy more of an ETF yesterday and so updated my tracking spreadsheet. I calculate my portfolio's style box using Morningstar data, and hadn't updated my spreadsheet since January. The effect of Morningstar's changes was fairly drastic: roughly a 10 point drop of large growth, 2 points went to large blend and 8 to large value. (I don't plan to make any portfolio changes because of this.)

So yeah if you use Morningstar data for targeting a tilt... surprise!

[nisiprius]

Whoa. What's this? Morningstar's factor exposures for VTI are almost straight across the middle as you'd expect, but what's with the dots for the large blend category averages?

Source



Does the average large blend fund score that low on the "volatility" and "liquidity" factors?

To make it clear which way is which, "low" means it invests in stocks with high volatility and high liquidity.

Volatility
The volatility factor describes the maximum observed spread in long-term returns, based on the trailing 12-month standard deviation of daily returns. A low percentile score for the volatility factor indicates larger variation in long-run outcomes.

Liquidity
The liquidity factor describes the trading frequency of a company, based on trailing 30-day share turnover. A low percentile score for the liquidity factor indicates higher share turnover.

The "index average" is more reasonable. Note that (for some reason) they are using the "Morningstar Large-Mid TR [total return] Index."

[nisiprius]

...
Moving the goal posts to accommodate Mag7, seems a little suspect.

I'm curious why it's a little suspect?

Because there's a narrative that that the stock market itself has developed a "concentration" or "overweight" or is "top heavy" with something. The something might be large growth or with tech or with the magnificent seven (not all tech!) The narrative says that the whole darned market is wrong.

Until the change, total market and S&P 500 index funds had actually drifted across the style box boundary, and thus were (according to Morningstar) in the "large blend" category but with a "large growth" style. And now, hey presto, VTI is large blend, VTI has (almost) always been large blend, VTI will always be large blend.



So it's possible to feel that Morningstar is covering up a change in the market, for some nefarious reason. Imagine a long-term chart of average global sea level, that it is to zero every few years on the basis that the definition of sea level is what level the sea is. Presto! No sea level rise, the sea level is always as high as itself.

I don't feel that way; I feel that the market is often very wrong, but that you can't tell which way it's wrong so you might as well stay the course in a total market fund.

But certainly, there's something troubling about a chart that seems to show that VTI changed from 2023 to 2024 when it was only the style boxes themselves that changed. And no asterisk on the chart to explain that.

[DaufuskieNate]

Right now, I guess companies that were previously growth are now blend and companies that were previously blend are now value. If the valuation differences between growth and value change so that they are less extreme, will Morningstar change the methodology again? Moving the yardstick so that everything appears balanced seems to be a slippery slope.

[rockstar]

Morningstar style box for VTI (as an example) was concentrated in large growth (35%+), and has been adjusted to approx half growth half value.

Moving the goal posts to accommodate Mag7, seems a little suspect.

I’m guessing there are some folks with a value tilt trying to achieve a 50/50 split who will be thrown off by this.

https://www.morningstar.com/whats-new/u ... ethodology

Nick

I’ve never seen good definitions for what’s growth versus what is value at the fund level.

[rkhusky]

Morningstar style box for VTI (as an example) was concentrated in large growth (35%+), and has been adjusted to approx half growth half value.

Moving the goal posts to accommodate Mag7, seems a little suspect.

I’m guessing there are some folks with a value tilt trying to achieve a 50/50 split who will be thrown off by this.

https://www.morningstar.com/whats-new/u ... ethodology

Nick

I’ve never seen good definitions for what’s growth versus what is value at the fund level.

I thought you used some measure like P/E and/or P/B to split the market, with half being growth and half being value. It’s always been a relative measure. Once the stocks are tagged, you just do a weighted average for a particular fund.

[Beensabu]

Right now, I guess companies that were previously growth are now blend and companies that were previously blend are now value. If the valuation differences between growth and value change so that they are less extreme, will Morningstar change the methodology again? Moving the yardstick so that everything appears balanced seems to be a slippery slope.

They don't have to change it again. Everything will always appear balanced for each peer group (7 regions, small/mid/large) and other funds are scored against their style neutral peer group.

https://advisor.morningstar.com/Enterpr ... ntered.pdf

[sleepysurf]

It appears that Vanguard's Portfolio Watch and Empower's Asset Allocation analysis both utilize Morningstar data. I prefer Empower, but utilize both, and each of their analyses now reflects the new Style Box data.

For the past decade, I've maintained a slight (~10%) Value and Size tilt to my portfolio. However, following the Morningstar update, I'm now significantly overweight Large Cap Value. Fortunately, most of that tilt comes from holding VVIAX (Vanguard Large Cap Value) in my Roth, vs. Total Stock Market Index.

Since my portfolio holdings haven't really changed, I'll sit tight for a few months and see how this all "shakes out" before considering a (tax-free) rebalance.

I suspect some large cap Portfolio Managers will be the one's most affected by this.

[nisiprius]

Notice that it is not at all clear whether "growth" is the opposite of "value."

Fama and French deserve some attention since their 1993 paper is sort of the foundation document of factor investing and tilting. They (weirdly IMHO) divided size into two categories, but value into three. They split size into "small" and "big." The split value spectrum into "high," "medium," and "low." The universe of stocks was sorted and split (again weirdly) 30%/40%/30%, not a third each. In any case, "high value" stocks by their definition always constitute exactly 30% of the market. The percentages are by count, not market capitalization, it seems:

We also break NYSE, Amex, and NASDAQ stocks into three book-to-market equity groups based on the breakpoints for the bottom 30% (Low), middle 40% (Medium) and top 30% (High) of the ranked values of BE/ME for NYSE stocks.

Notably, the word "growth" never appears, and the stocks that have low loading on value are simply called "low value," not "growth."

This all reads as super arbitrary to someone outside the culture to which Fama and French belong, and the paper really has only vague handwaving to explain or justify it.

As noted above, there are about 30 stocks that appear in both the Vanguard Growth Index and also in the Vanguard Value Index funds. As far as CRSP and Vanguard are concerned, it is perfectly possible for a stock to be both a growth stock and a value stock at the same time.

I don't know if Morningstar does the same thing. Hopefully their style boxes are mutually exclusive, but if so they are probably not defining "growth" and "value" the same way index providers are.

[Random Musings]

Over the past 15 years or so, people have valued growth more, which makes perfect sense as growthing value doesn't.

Shifting the goalposts towards the value side will not change my investment plan one bit. It may, however, for those whose allocation plans rely on M* boxes. At that point, are you staying the course or are you style box chasing?

RM

[Harmanic]

They did it again. Now SPY is a Value Fund. Ridiculous.

[nisiprius]

They did it again. Now SPY is a Value Fund. Ridiculous.

???? Not seeing it. I'm seeing "large blend." What are you looking at?

https://www.morningstar.com/etfs/arcx/spy/quote



https://www.morningstar.com/etfs/arcx/spy/portfolio

[rkhusky]

Waiting to see if Wellington goes back to Large Value where it used to be.

[Gecko10x]

So now if you look at the historical style, it says in 2023, it was large growth and now it's large blend. How is that helpful with no context that it shifted because they changed the benchmark??

[Beensabu]

So now if you look at the historical style, it says in 2023, it was large growth and now it's large blend. How is that helpful with no context that it shifted because they changed the benchmark??

It's just a lesson not to take anything at face value.

[Harmanic]

They did it again. Now SPY is a Value Fund. Ridiculous.

???? Not seeing it. I'm seeing "large blend." What are you looking at?

I am looking at the weight going from heavily skewed growth to skewed value.

[nisiprius]

They did it again. Now SPY is a Value Fund. Ridiculous.

???? Not seeing it. I'm seeing "large blend." What are you looking at?

I am looking at the weight going from heavily skewed growth to skewed value.

Are you looking at the same thing I'm looking at? Morningstar calls it out as having large blend style, and on the basis of their numbers, laterally it's close to the center of "large blend" and nowhere near the edge. The dot on the growth/value style thermometer is so close to the center that the index dot is inside the style dot.

Source

[nisiprius]

So now if you look at the historical style, it says in 2023, it was large growth and now it's large blend. How is that helpful with no context that it shifted because they changed the benchmark??

It's just a lesson not to take anything at face value.

Yeah, but they really ought to have a little footnote about that.

Waiting to see if Wellington goes back to Large Value where it used to be.

Based on what's showing for other funds, style boxes seem to be reflecting the change already.

And with the new chart, which as I say seems to reflect the new classification, it's plainly within large growth. It's not borderline, that's a growth tilt.

Source




Wellesley's style is classified as large value, and the revamp hasn't changed that.



The interesting question is why we all think Wellington is large value (yes, I did, too). I assume it used to be true, and I assume there's been style drift, and I wonder when it happened. The two current managers began their tenures in 2017 and 2019.

If you invest in actively managed funds, you have to keep your eyes on the managers. I wonder if they said anything about switching from value to growth in any of their notes in the annual reports?

[rkhusky]

Waiting to see if Wellington goes back to Large Value where it used to be.

Based on what's showing for other funds, style boxes seem to be reflecting the change already.

And with the new chart, which as I say seems to reflect the new classification, it's plainly within large growth. It's not borderline, that's a growth tilt.

Source




Wellesley's style is classified as large value, and the revamp hasn't changed that.



The interesting question is why we all think Wellington is large value (yes, I did, too). I assume it used to be true, and I assume there's been style drift, and I wonder when it happened. The two current managers began their tenures in 2017 and 2019.

If you invest in actively managed funds, you have to keep your eyes on the managers. I wonder if they said anything about switching from value to growth in any of their notes in the annual reports?

That chart for Wellington is from 6/30/24. I’m not sure when Morningstar changed their methodology. But yes, the Wellington managers could have changed their investing strategy over time.

[BitTooAggressive]

Believe me, no zinging intended. Sorry.

My point is just that nobody should take these classifications too seriously; they all contain arbitrary and subjective elements.

From the moment they started discovering all those new factors I wondered what Morningstar was going to do about it in their style diagrams and category designations. And the answer is: nothing. They don't have a "US quality small value" category.

But they have the thermometer looking things to show the factor loadings. They do a good job in what they present IMO. There is a trade off in accuracy and completeness. They want to have something someone can understand that does not have a PHD in finance.

[Beensabu]

The interesting question is why we all think Wellington is large value (yes, I did, too). I assume it used to be true, and I assume there's been style drift, and I wonder when it happened. The two current managers began their tenures in 2017 and 2019.

Take a look at the top 5 holdings.

I'm guessing the managers couldn't afford not to hop on that momentum ride along with everyone else.

[nisiprius]

The interesting question is why we all think Wellington is large value (yes, I did, too). I assume it used to be true, and I assume there's been style drift, and I wonder when it happened. The two current managers began their tenures in 2017 and 2019.

Take a look at the top 5 holdings.

I'm guessing the managers couldn't afford not to hop on that momentum ride along with everyone else.

Boy, you're right. So obvious.

Wellington, VWELX:

MSFT Microsoft Corp.
AAPL Apple Inc.
NVDA NVIDIA Corp.
GOOGL Alphabet Inc. Class A
AMZN Amazon.com Inc.

Wellesley, VWINX:

JPM JPMorgan Chase & Co.
MRK Merck & Co. Inc.
EOG EOG Resources Inc.
COP ConocoPhillips
JNJ Johnson & Johnson

Actively managed funds, gotta love 'em.

In Clash of the Cultures, John C. Bogle described what he called the "rise" (1929-1966), "fall" (1967-1978), and "resurrection" (1979-2012) of the Wellington Fund. He attributed the fall to a change from staid, conservative management to a failed attempt to adopt a modern, "go-go" style. There was certainly a vague impression that Wellington had learned its lessons and would stick to its knitting from then on.

Of course I can't say if the current managers are right or wrong, but it certain is a sharp departure from the traditional Wellington style. I don't remember this being discussed in the forum.

[Beensabu]

Of course I can't say if the current managers are right or wrong, but it certain is a sharp departure from the traditional Wellington style. I don't remember this being discussed in the forum.

"Fund Famed For Conservative Management Capitulates to Mega Tech Growth Strategy"

Harbinger.

[Electron]

Here is some information on Wellington fund that I posted earlier in the year that may be of interest.

If anyone has premium access to Morningstar they update their analysis on the fund on a regular basis.

https://bogleheads.org/forum/viewtopic. ... 7#p7864967

"It might be worth mentioning that Daniel Pozen took over management of the equity portion of Wellington fund in July 2020. A number of changes have been made to the fund. The percentage invested in value stocks has been reduced in favor of a higher percentage in growth stocks. In checking the current holdings, I see that the five largest holdings are all members of the Magnificent Seven that we hear about all the time in the news. Pozen has also reduced the number of equity holdings with an emphasis on high-conviction security selection. The Price to Earnings ratio of the stock holdings is now closer to the S&P 500 benchmark."

Morningstar moved the fund from the large-value category to the large-blend category.

[WS1]

Maybe we should only talk about asset allocation in terms of factor loading and not style boxes.

[grabiner]

And meanwhile, there are thirty stocks that are in both the Vanguard Growth and Value index funds.

This is the result of index transition rules. When a stock moves out of the index range, it moves 50% to the other index at the next reconstitution, and another 50% at the following reconstituion if it is still outside.

The same thing happens with size indexes. If a small-cap stock grows beyond the buffer zone between small-cap and mid-cap, it will be 50% in the mid-cap index and 50% in the small-cap index at the next reconstitution. If it is still beyond the buffer at the next reconstitution, it will be 100% in the mid-cap index.

The purpose of these rules is both to reduce turnover, and to have an index that reflects the longer-term history of a stock. If a stock moves back and forth near the growth/value boundary, it doesn't switch from growth to value indexes and back.

[sleepysurf]

This is the result of index transition rules. When a stock moves out of the index range, it moves 50% to the other index at the next reconstitution, and another 50% at the following reconstituion if it is still outside...

Interesting! I didn't know that. I guess one could say the Index transition rules favor "Dollar Cost Averaging" to some extent, vs. "Lump Sum!"

[nisiprius]

And meanwhile, there are thirty stocks that are in both the Vanguard Growth and Value index funds.

This is the result of index transition rules. When a stock moves out of the index range, it moves 50% to the other index at the next reconstitution, and another 50% at the following reconstituion if it is still outside.

The same thing happens with size indexes. If a small-cap stock grows beyond the buffer zone between small-cap and mid-cap, it will be 50% in the mid-cap index and 50% in the small-cap index at the next reconstitution. If it is still beyond the buffer at the next reconstitution, it will be 100% in the mid-cap index.

The purpose of these rules is both to reduce turnover, and to have an index that reflects the longer-term history of a stock. If a stock moves back and forth near the growth/value boundary, it doesn't switch from growth to value indexes and back.

Thanks! I didn't know that.

[grabiner]

This is the result of index transition rules. When a stock moves out of the index range, it moves 50% to the other index at the next reconstitution, and another 50% at the following reconstituion if it is still outside...

Interesting! I didn't know that. I guess one could say the Index transition rules favor "Dollar Cost Averaging" to some extent, vs. "Lump Sum!"

Reference from CRSP: View Methodology Guide PDF

[nedsaid]

Here is the stock Stylebox that I posted back on July 3rd. This Stylebox is in regard to my retirement accounts.

20 20 22
08 09 05
07 07 03

Here is the stock stylebox as of today.

24 23 14
08 09 04
07 07 03

It is almost the same exact portfolio but you can see the differences in the Large Cap space.

It is like, Dude, where did all that Large Growth go?

In other words, Morningstar's adjustments in their methodology made it look like Nedsaid made a fairly large move in my portfolio. In reality, nothing had really changed, it was just that the measuring sticks changed. Dad gummit anyhow, why did Morningstar do this? (I know why but I don't like it).

[sleepysurf]

Reference from CRSP: View Methodology Guide PDF

Great reference David!

The examples of how they handle companies in "transition" and details of how the quarterly "reconstitution" process works is much more sophisticated than I expected.

Now I better understand those who say "passive indices" still have an "active" component, as does Morningstar's revised Style Box calculation.

Bottom line for me will be to "stay the course" with my current allocation (with moderate value and size "tilts"), but check again after another quarter, and decide if I want/need to make any small adjustments.

There's a LOT to be said for the simplicity of the "Three Fund Portfolio!"