What Is an Equity Style Box?
An equity style box is a visual representation of the key investment characteristics of stocks and stock mutual funds. The style box was created by Morningstar and is a valuable tool for investors to use to determine the risk-return structures of their stocks/stock portfolios and/or how these investments fit into their investing criteria.
- An equity style box is a graphic used to demonstrate the main characteristics of a stock or mutual fund, including market cap and investment style.
- The style box is a nine-square grid with a horizontal and vertical axis and was designed by financial services researcher Morningstar, Inc.
- Investors can use the boxes for research, such as determining if a potential investment is appropriate for a portfolio that needs a specific asset allocation.
Understanding Equity Style Boxes
An equity style box is composed of nine squares, or categories, with the investment features of stocks/stock mutual funds presented along its vertical and horizontal axes. Institutional investment managers will use equity style box categories as a central consideration for their portfolio management objectives. Investors of all types can use equity style box categories to screen stocks and mutual funds for individual investing characteristics.
For stocks and stock funds, the vertical axis is divided into three company-size categories based on market capitalization: large, medium, and small. The horizontal axis represents the investment style and varies slightly for stocks and stock funds. Both stocks and stock funds include value and growth categories. For stock investments, Morningstar classifies the middle category, which can generally be considered as a mix of value and growth, as a core for stocks and blend for funds. Investors will often see these categories used in stock reports and mutual fund marketing materials.
Investors use equity style boxes to identify specific stocks or stock funds for targeted investment portfolio allocations. Risk factors can typically be an important consideration when filtering for investments by style box. Small-cap stocks and growth stocks generally report higher risks with a higher potential return. Large-cap value stocks are often a low-risk choice for investors seeking long-term investments. The blend category will include funds that have a mix of growth and value stocks. For stocks, the core category refers to investments that can be good long-term holdings offering consistent capital appreciation potential.
Morningstar offers a domestic equity style box, an international equity style box, and a fixed-income style box.
Equity Style Box Investments
Morningstar allows investors to filter funds by the equity style box category. For example, a mutual fund investor looking for relatively safe equity investments with the highest potential return could filter for funds in the large-cap/growth category.
Morningstar describes the category as funds that invest in big U.S. companies that are primed to grow faster than other large-cap stocks. Large-cap funds are considered to be those that invest in stocks in the top 70% of the capitalization of equity markets. Growth refers to fast growth and high valuations.
As of 2020, some of Morningstar's highest-ranked large-cap/growth funds include Lord Abbett Growth Leaders Fund, Leland Thomson Reuters Vntr Cptl Idx Fund, Morgan Stanley Inst Growth Port and Inst Advantage Port, JPMorgan Large Cap Growth Fund, and Fidelity Advisor Series Growth Opps Fd.