Morningstar is one of my favorite companies. They are based in Chicago and for a couple of decades they have offered the premier research service for mutual fund data and analysis. Over the years they have added coverage of stocks, managed accounts, ETFs and other investment vehicles. I think that their stock research is among the best-presented work you'll find anywhere. Maybe its because their analysts tend to be liberal arts graduates who just like talking and writing about investing, as opposed to Finance MBA-types like me.
Morningstar is known for, among other things, the "Style Box". This grid contains nine boxes, and each box represents the type of investment (growth, value or core- mix of growth and value) and the size of the companies involved (large, medium or small cap). The style box spawned an entire segment of the investment industry. It literally took the concept of asset allocation and put it on the map. Morningstar even supplied the map.
Style box investing was all the rage in the investment advisory profession during the 1990's. In fact, if you look at how mutual funds and managed accounts are created today, a lot of it goes back to the producer's desire to build a product to fit an area of the style box. It is common to see a company with a single mutual fund, which did not have a clear style bias, renamed, say the "Large Core Portfolio". The management company would then introduce a Large Cap Growth Portfolio and a Large Cap Value portfolio. Later on, they would build or acquire a small cap fund, and perhaps a mid-cap too. They'd keep going until they were confident that their sales force could now go out and market to advisors, armed with their own brand of box-filling products.
I think that this is very 1990's thinking, and it is potentially detrimental to you as an investor. The reason is simple: style box investing does not reduce your risk as much as you think it does!
Unwrapping The Box
One money management firm we know touts their firm's flexibility in being able to invest in any stock style whenever they want. At the same time, they run a fairly concentrated portfolio. They refer to their philosophy as "unwrapping the box," which is clearly aimed at refuting the style box mentality in today's post-bubble environment. I'm right there with them. Investing for the next generation, in my opinion, is more about maintaining the highest degree of flexibility you can, not clinging to a rigid, boxy style of portfolio construction. I don't see anything in the latter approach (style box) that cannot be accomplished by the former (flexible). I think that the investment industry is slowly starting to pick up on this.
As for Morningstar, we still love them. They have grown into much more than the authority on style boxes.
If advisors and their firms do not take a good look at the changing face of asset allocation and continue to live in the 90's, they risk going the way of the bulky, three pound mobile phones we used early in that decade. I think my little girl Morgan plays with an old one. And when she's done pretending to talk on it for a few seconds, she throws it on the floor and goes on to something else. My team and I don't want to be that mobile phone. You don't want to be one either.
The preceding article is not a complete analysis and should not be considered investment advice. Emerald Asset Advisors, LLC is a registered investment advisor. If you would like to receive more information about Emerald, please contact us for a copy of our disclosure document, Form ADV Part 2 and Schedule F.
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