What Is the International Equity Style Box?
The 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 their risk, return, and diversification potential of global stock portfolios.
- As of 2004, Morningstar uses the same methodology and criteria for building style boxes for both domestic and international stocks and mutual funds.
Understanding International Equity Style Boxes
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.
his methodology was originally introduced in May 2002 for U.S. stocks and portfolios only.
The difference between the equity style box and the international equity style box originally lie 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 considered median market capitalization. Today, all style boxes use the same criteria. The three broad categories are less than US $1 billion, $1 billion to $5 billion, and more than $5 billion.
Limitations of the International Equity Style Box
Investment research firm Morningstar introduced their 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 can’t be represented in the style box. Some other strategies are not committed to a consistent growth, value, or 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.