If you follow mutual fund performance, it's likely you've heard of Morningstar's star ratings and style box-the company's systems for rating and classifying funds. Many investors use Morningstar's ratings and other information to analyze mutual funds for their portfolios.

Who Is Morningstar?

Morningstar, Inc., is an independent investment research company based in Chicago. The company has been a widely used source of information and analysis regarding mutual funds since 1984. Today Morningstar also tracks other types of investments, including individual stocks, exchange-traded funds (ETFs) and separate accounts.


Morningstar Star Ratings

Morningstar issues star ratings for thousands of mutual funds based on their relative performance within more than 40 narrowly defined fund categories. Funds earn from one to five stars based on their risk-adjusted performance compared with funds with similar objectives. For example, a large-cap growth fund is compared with other large-cap growth funds. Morningstar categorizes each fund based on the securities in its portfolio. The ratings can help you compare funds within a specific category.


Morningstar Style Box

Morningstar also places each mutual fund in one of nine squares that make up its style box. According to Morningstar, the style box is a simple tool that investors can use to understand a fund's characteristics.

The style box for stock funds uses two factors:

  • Market capitalization, meaning the size of the companies in the fund's portfolio. Morningstar defines each fund as small-, mid- or large-cap by using a weighted measurement of all the stocks in the fund's portfolio.
  • Investment style, which is defined as growth, value or a mix of the two styles called "blend." Morningstar uses a total of 10 factors, five growth factors and five value factors, to analyze the stocks in each fund's portfolio.

Morningstar Style Box

Morningstar also provides style box positioning for bond funds by looking at their overall credit quality and interest rate positioning.


Don't Forget Other Factors

Remember that the star ratings are based on past performance, and past performance is no guarantee of future results. And a fund's star rating (or any performance-based fund ranking) is just one factor you should weigh when selecting funds for your portfolio.

Other issues to consider include:

  • your risk tolerance and investment time horizon
  • the fund's management style
  • the tenure of the fund's manager(s)
  • the stability of the fund company
  • the fund's compatibility with your investment goals

Keep in mind that a well-diversified portfolio includes stock, bond and money market investments. For further diversification in the stock portion of your portfolio, you may want to consider including an appropriate mix of growth and value funds, exposure to stocks of companies of varying sizes and international investments.


This information is for educational purposes only and is not intended as investment advice.