Style Box

Style Box

According to their market capitalization and investing style, mutual funds are categorized in the fund style box. The style box was created by Morningstar, Inc., a mutual fund research firm offering data and research services to investors, to simplify comprehending a mutual fund’s investment goals and tactics. 

The style box is a graphical representation of an investment’s sensitivity to different risks. The style box has nine different squares representing different investment styles. The three rows represent risk levels, and the three columns represent return levels. 

Using the Morningstar style box, you can assess your portfolio’s diversification and risk/return balance. 

What is a style box? 

The Morningstar style box is a nine-square grid used to determine the investment philosophy of equities and mutual funds. The style box was created by Don Phillips and John Rekenthaler of Morningstar, and released in 1992. 

The Style Box’s vertical axis represents the small, mid, and large-size investment categories. The horizontal axis shows stock and fund-specific investment strategy categories like “value” and “growth.” The central column’s definition of “blend” is different for stocks and funds. The center column of the Style Box will indicate the blend style for funds and the core style for equities, respectively. 

Understanding the style box 

In 1992, Morningstar unveiled its exclusive design package. Thanks to its straightforward, useful visual classification system, it quickly became a standard in the investment industry. In all its variants, the style box should still be used due to its simplicity and widespread use. 

Market capitalization is depicted on the vertical axis. The market value of a large-cap firm is greater than 10 billion USD. Market values for mid-cap corporations range from 2 billion USD to 10 billion USD. Small-cap companies have a market capitalization of fewer than 2 billion USD. 

The fund is categorized by investment style on the horizontal axis, depending on whether it employs a value, growth, or blend strategy. Mutual funds that hold companies with higher P/E ratios are known as growth funds, while those with lower P/E ratios are known as value funds. Blended funds make investments in growth and value equities. 

How do style boxes work? 

The vertical axis of the style box divides market capitalization into three company-size indicators for stocks and stock funds: large, medium, and tiny. Stocks and mutual funds have slightly different horizontal axes.  

Value and growth styles are intended to be represented via the horizontal axis. Individual stocks are categorized in the stock style box according to growth, value, and core. Individual stocks are categorized in the stock mutual fund style box according to value, growth, and blend. 

The classification method can determine how an investment fits into a specific portfolio from an asset allocation standpoint. While some investors use it to identify a fund for every category, others concentrate on particular niches. 

Style box analysis 

Even though Morningstar is the main source for style box analysis, the technology used throughout the sector can create a variety of style box representations. Using a style box, investors can better understand an investment’s attributes and characteristics. An investor can also apply style box analysis to create a diverse portfolio of investments across several categories. 

Investors can use Morningstar to filter funds based on the style box category. Investors should conduct thorough due diligence to ensure a fund aligns with their investment goals, even while the style box category serves as an investment guide.  

By style box category, Morningstar evaluates companies and funds for international investments. Both domestic and foreign investments with a wide range of risk characteristics are included in their style box rankings. 

Example of style box 

A company considered a “value” stock would be trading at a low price-to-earnings ratio and have a high dividend yield. A “blend” stock would be between a value and a growth stock. A “growth” stock would be trading at a high price-to-earnings ratio with a low dividend yield. 

A style box is a helpful tool for investors because it can give them a quick way to identify a company’s investment style. However, it is important to note that a company’s investment style can change over time, so the style box is not a perfect tool. 

Frequently Asked Questions