Do You Know the Style of Your Investment Portfolio?

Yes, your investment portfolio has a particular style. For example, how much of it is in large, medium and small market cap stocks? Is it growth oriented or value oriented or somewhere in-between? Do you know the style of your investment portfolio?

Let’s Categories!


The equity investments, stocks or bonds, are broadly classified into following categories:

  • Large Cap: Typical Market Cap Range: Over $10 billion
    • Growth, Value, Blend
  • Medium Cap: Typical Market Cap Range: $2 billion and $10 billion 
    • Growth, Value, Blend
  • Small Cap: Typical Market Cap Range: $300 million to $2 billion
    • Growth, Value, Blend

The term “cap” in this article refers to market cap or market capitalization which is the market value of a publicly traded company’s outstanding stocks. 

When looking at individual stocks, it is easier to classify it in one of the aforementioned nine categories. For instance, Amazon, Alphabet (Google), Microsoft, and Tesla are large growth stocks. While AT&T, Exxon, Bank of America, and Johnson & Johnson are large value stocks. However, it is a challenge to determine the style of a mutual fund or an ETF because it is made-up of multiple stocks or bonds or the combination of stocks and bonds.

How Do You Determine the Style of Your Investment Portfolio?


The Morningstar investment style boxTM is one of the tools you can use to visualize the style of your investments. It is the simplified representation of your portfolio from large cap to small cap and from value to growth. In essence, the Morningstar style box is a 3 x 3 grid consisting of nine boxes. 

It can be found on the morningstar.com quote page under the “portfolio” tab. The following is the example of various well known companies and their characteristics according to the Morningstar style box. 

ValueBlendGrowthSize
Bank of America
Johnson & Johnson
Pfizer
AT&T
Apple
Honeywell
Home Depot
Amazon
Microsoft
Alphabet
Facebook
Large
Kroger
United Airlines
Whirlpool
Ralph Lauren
IDEX Corp
Teledyne Technologies
Williams-Sonoma Inc
Dropbox
MGM Resorts
Mattel
Under Armour
Mid
AMC
MarineMax
iRobot Corp
Sleep Number
CarGurus
Chart Industries
Small

What Does The Style Box Tell You?


Most investors own mutual funds or ETFs which are made up of multiple stocks with different characteristics which makes it challenging to determine the style of the investment. The Morningstar Style Box makes it easy to visualize the overall characteristics of a mutual fund or ETF. Let’s use the style box to compare two mutual funds.

Vanguard Total Stock Market Index Fund (VTSAX)

Vanguard Vanguard 500 Index Fund (VFIAX)

Vanguard 500 Index (VFIAX)



Looking at the blue eclipse indicates a large % of the fund is in the large cap category with small exposure to mid cap and no exposure to small cap stocks.  
To dig deeper, let’s view the weight in each box. The following indicates higher weightage to large blend and growth oriented companies. 




Vanguard Total Stock Market Index (VTSAX)


In comparison to Vanguard 500 Index Fund, Vanguard Total Stock Market Index Fund has more exposure to mid-cap stocks and some exposure to small cap stocks.
Here is the style box for VTSAX indicating weight in each category. 





How do you use this information?


The style box helps you in making the decision about your investment approach. For instance, according to your investment policy statement, the goal is to invest 10% of your total equity exposure into small cap stocks, Vanguard 500 Index Fund (VFIAX) may not be the right choice as the fund has no exposure to small cap stocks. In comparison, Vanguard Total Stock Market Index Fund (VTSAX) has some exposure to small cap stocks. So VTSAX may be a better choice if you want small cap exposure. 

Another way to add small cap exposure is by adding a small cap stock fund such as Vanguard Small Cap Index (VSMAX). The following is a VSMAX style box indicating the majority of exposure to small cap blend stocks.

What about the style of your bonds?


The style box for bonds is based on interest rate sensitivity from limited to extensive and credit quality from high to low.

For example, the bond fund made up of mostly US Treasuries is expected to be high quality compared to corporate bonds. And the long duration bonds would be more sensitive to interest rate changes compared to the short duration bonds. In general, the value of a bond fund would decrease with interest rate rises and the value of the bond fund would increase when interest rate falls. 

Let’s look at a few examples.

Vanguard Long-Term Treasury ETF (VGLT)Vanguard Short-Term Treasury Fund (VFIRX)


As expected, a long-term treasury fund has extensive sensitivity to interest rate due to long maturity duration compared to the short-term treasury bond bunds. Moreover, as expected, the credit qualities for both funds holding is AA to AAA (highest) as they hold the US Treasury bonds. 

Now let’s compare Treasury Bond Funds with Vanguard Total Corporate Bond ETF (VTC). 

The credit quality of corporate bond funds is lower than treasury bond funds / ETF. Since the duration is longer, this particular fund has extensive sensitivity to interest rates.

Factor Profile

Besides the size and the style, Morningstar added a factor profile as well. 

Morningstar Factor Profile includes five factors; yield, momentum, quality, volatility, and liquidity to complement the style box which comprises two factors; style and size. The factor profile is a visual representation of seven factors over the last five years. Following is the factor profile for Vanguard Total Stock Market Index Fund (VTSAX).

Here is a quick observation from the factor profile: 

The fund became slightly more growth oriented and volatile while the yield has gone down in the last five years. However, overall this particular fund kept its overall characteristics; a large cap blend mutual fund. So the factor profile is a useful tool to evaluate historical characteristics of a mutual fund or an ETF. The tool can be used to visualize a “style drift” of an investment.

Is your investment portfolio style Drifting?

When a mutual fund or ETF drifts from one style to another style, it is a style drift. For example, a fund may be categorized as a large blend style but overtime drifts to a large growth style.

For example, the overall style of Vanguard Total Stock Market Index Fund (VTSAX) has not changed in the last five years as indicated by historical style box data from Morningstar. The factor profile above for VTSAX also suggests no significant drift in other factors as well.

In comparison, the actively managed Fidelity Mid-Cap Stock Fund (FMCSX) has drifted from “mid blend” to “mid value”. The fund style drifted from mid-cap growth to mid-cap blend over the last five years.

The drift is much more noticeable under the factor profile of Fidelity Mid-Cap Stock Fund (FMCSX). The chief amongst them are growth, yield and momentum factors. 

In general, actively managed funds / ETFs are more prone to style drift compared to the broad-based index funds. So if you are using an actively managed mutual fund or ETF, consider reviewing the style and the factor profile of the fund / ETF and make sure it meets your investment goal.

Summary

The Morningstar Style BoxTM along with Factor Profile provides a snapshot of a fund’s or an ETF’s exposure to seven factors. The factor profile complements the style box by adding five additional factors besides style and size such as yield, momentum, quality, volatility, and liquidity. Beyond understanding a fund’s characteristics and factor profile, these tools can be used to check if the fund exposure aligns with its investment approach. Most importantly, Morningstar Style Box and Factor Profile can be used to understand the style of your investment portfolio. 

What do you think? Do you know the style of your investment portfolio? It is time to “look under the hood”.




Get our next article in your mailbox.

Join Investors In Mind and Money Blog

* indicates required

Leave a Reply

Your email address will not be published.