Portfolio Construction and Monitoring Tools

Many investors know how to buy good securities, but they need your help to assemble diversified portfolios that make it easy to achieve their investment goals. Until just a few years ago, however, the industry lacked a unified framework that combined stock research, fund research, portfolio assembly, and market monitoring to help you provide assistance.

Morningstar Style BoxSM

While it was the standard for classifying funds and a framework for understanding portfolios, Morningstar recognized that their original Style Box was not a good tool for unifying investment selection, constructing portfolios, and monitoring markets. So they made improvements.

“We needed to build something more robust. The original Morningstar Style Box was based only on price-to-earnings and price-to-book ratios,” said Timothy Armour, managing director of Morningstar. “Our new model goes beyond this simple approach to better reflect a manager’s thinking.”

The new Morningstar Style Box, which is incorporated in many of the features of the Morningstar Advisor Workstation in NetX360®:

  • Includes more variables than price-to-earnings and price-to-book ratios
  • Evaluates growth distinctly from value and includes forward-looking variables
  • Extends its applications to stocks and indices


Construct Better Portfolios

In addition to its use of the Morningstar Style Box, there are many tools that make Morningstar Advisor Workstation within NetX360 a useful platform for building diversified portfolios and monitoring the market, including:


  • Ownership Zones is a graphical tool that gives investors a more complete picture of a mutual fund’s holdings. You can illustrate a fund’s Ownership Zone by plotting each stock in the fund’s portfolio within the Morningstar Style Box. The area in which most of the holdings fall is shaded to provide an intuitive representation of the area of the market in which the fund invests. A red dot in the middle of the Ownership Zone represents the weighted average of all the fund’s holdings. You can also plot two funds to compare their holdings and review a clear, visual depiction of their style differences. Another useful feature of Ownership Zone is the Portfolio Assembly tool. Use it to load the client’s funds into the program to see where the overall portfolio falls within the Morningstar Style Box and to analyze the holdings.
  • Better Benchmarks are now available using the Morningstar Style Box. Previously, market monitoring indices did not make sense as guides for portfolio construction. Investors who choose to follow these indices wind up with poorly diversified portfolios. In fact, using the Portfolio Assembly tool to track the makeup of popular indices like DJIA®, S&P 500®, and NASDAQ®, the portfolios fell into the top right Large Core Index and Large Growth Index zones of the Morningstar Style Box. These particular zones were among the first style boxes to show declining returns in 2000, 2001, and 2002. The new Morningstar Style Box, however, offers an enhanced market-monitoring feature in which each of the nine squares shows returns as a gain or loss for that particular zone.
  • Sector Diversification is essential for investment success. You may, for instance, use the Sector Web tool in Morningstar Advisor Workstation to examine the following three sectors and identify areas of a portfolio that are overweight: Information Economy (software, hardware, media, and telecommunications); Service Economy (healthcare services, consumer services, business services, and financial services); Manufacturing Economy (consumer goods, industrial materials, energy, and utilities). Or use the Sector Delta tool to uncover a manager’s thinking. This is a particularly useful tool for helping clients to better understand their overall portfolios as well as any of its particular components. Sector market monitoring is also useful in helping you assess a portfolio’s exposure to a specific sector. It is particularly useful when you acquire a new account, as you can use it to decompose the portfolio and identify areas for improvement in terms of construction.


The Value of a Visual

Use these Morningstar Advisor Workstation tools to improve communication, demonstrate how your clients’ portfolios are performing, and show how you plan to help them achieve their investment objectives. Drive your advice home with Morningstar’s signature reports, which you can access online, print, or download.

The information contained in these materials is believed accurate at the time of writing but is not guaranteed. Delta accepts no responsibility for its use whether in whole or part.