What Is an International Equity Style Box?
An international equity style box is a three-by-three grid for visually representing and comparing risk-return structures of foreign stocks and foreign funds. Investors use the international equity style box, a variation on Morningstar's stock style box, to understand the degree of diversification of their international portfolios.
As of March 31, 2004, all U.S. and non-U.S. stocks and mutual funds are evaluated under the same style methodology.
- The international equity style box is a visual heuristic for evaluating the investment criteria of global stocks.
- Adapted from the original equity style box, the international version helps investors understand the risk, return, and diversification potential of global stock portfolios.
- On the style box, the horizontal axis measures value and growth characteristics, which breaks down into three sections: value on the left, growth on the right, and blend in the middle.
- The vertical axis measures capitalization and breaks down into small, medium, and large.
- As of 2004, Morningstar uses the same methodology and criteria for building style boxes for both domestic and international stocks and mutual funds.
Understanding an International Equity Style Box
The international equity style box, also known as the international stock style box, is a two-dimensional grid. The horizontal axis measures value and growth characteristics, which breaks down into three sections: value on the left, growth on the right, and blend in the middle.
The vertical axis measures capitalization and breaks down into small, medium, and large. This scheme produces nine categories with which to classify investments.
If investors assign each of the foreign investments in their portfolio to a square on the international equity style box, they will get a simplified picture of the degree of diversification. If their portfolio is not sufficiently diversified, the international equity style box will make it immediately apparent which investment categories are not yet represented.
The fixed-income style box is based on interest-rate sensitivity and credit quality.
The difference between the equity style box and the international equity style box originally lies in the sizing system. Whereas the equity style box determines the size of a company by the geometric mean of market capitalization, the international equity style considers median market capitalization. Today, all style boxes use the same methodology.
Limitations of an International Equity Style Box
Investment research firm Morningstar introduced its proprietary style box in 1992. Its simple, effective visual classification system soon made it ubiquitous in the investment world. Its simplicity and ubiquity remain two strong reasons to continue to use the style box in its several forms, but it has its limitations.
For one, the style box does not include short positions in its classification system. That means a long-short investment strategy cannot be represented in the style box. Some other strategies are not committed to consistent growth, value, or a blended approach. Investment products managed by these strategies will bounce all over the style box as the nature of their holdings shifts along the horizontal axis.
Some analysts have speculated that the popularity of the style box unduly restricts fund managers who may avoid certain sound investment strategies because they would cause the fund to change categories in the style box, which may frustrate shareholders who bought into the fund partly because of its style box classification.
Style boxes can be used for purposes other than analyzing mutual funds. One of the primary uses is determining whether a money manager is sticking to its stated strategy.
For example, if an investment manager states its core strategy is 80% growth stocks and 20% fixed income securities, and over time its portfolio shifts to 70% value stocks and 30% fixed income, an investor may decide the strategy is no longer for them.
A style box provided by the money manager can easily help demonstrate how the portfolio mix is constructed and how it has changed.
Style boxes can also be used to analyze the performance of various money managers. Analysts can develop hypothetical portfolios that consist of a variety of money managers that demonstrate the performance results and consistency of money managers, helping investors choose what is best suited for them.
Morningstar's international style box was created in 1992. It is a grid consisting of nine squares, which classifies securities by size on the vertical axis and by value and growth on the horizontal axis.
Morningstar's box uses a "building block" method with style determined at the stock level and "those attributes are rolled up to determine the overall investment style of a fund or portfolio." The framework links different processes: stock research, fund research, portfolio assembly, and market monitoring. The box uses 10 different stock attributes.
What Is a Fixed-Income Style Box?
A fixed-income style box is a representational grid that provides a visual display of the investment features of fixed-income securities. The fixed-income style box was created by Morningstar and is primarily used for mutual funds. They help investors choose investments based on criteria and help them understand the risk-return structures of their investments.
What Information Does the Morningstar Style Box Provide?
The Morningstar style box provides investors with the investment style and stocks of a mutual fund. It classifies stocks according to market capitalization, growth, and value factors. Scores include forward-looking measures, historical earnings growth, sales growth, book value growth, price/book, and dividend yield.
Who Invented the Style Box?
The style box at Morningstar was developed by Don Phillips. He was Morningstar's first mutual fund analyst and became CEO of the firm.