Morningstar's Fixed-Income Style Box
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Morningstar's Fixed-Income Style Box
The fixed-income style box is a nine-square box that gives you a visual snapshot of a fund's credit quality and duration. The style box allows investors to quickly gauge the risk exposure of their bond fund.
Things To Know
- The style box is a nine-square box that gives you a visual of a fund's credit quality and duration.
The horizontal axis
The horizontal axis of the fixed-income style box displays a fund's interest rate sensitivity, as measured by the average duration of all the bonds in its portfolio. Morningstar breaks interest rate sensitivity into three groups: short, intermediate, and long. In previous lessons, we explained that short-term bond funds are the least affected by interest rate movements and thus the least volatile; long-term funds are the most volatile. Taxable bond funds (as opposed to municipal-bond funds, which are protected from taxes) with average durations of less than 3.5 years fall in the short-term column; those with average durations longer than six years fall in the long-term column. Everything else is intermediate. (The cutoffs for municipal-bond funds are slightly different, but not appreciably so.)
The vertical axis
The vertical axis of the style box measures credit quality and is also broken into three groups: high, medium, and low. A fund's placement is determined by the average credit quality of all the bonds in its portfolio. Funds with high credit qualities tend to own either U.S. Treasury bonds or corporate bonds whose credit quality is just slightly below that of Treasuries. On the other hand, funds with low credit quality own a lot of high-yield, or junk, bonds. Medium-quality funds fall between the two extremes.
How to use it
The style box can make it far easier for investors to find appropriate funds. Say you need a fund that carries only slightly more risk than a money market fund. Just look for funds that fall within the short-term, high-quality square of the style box. Or perhaps you want a rich income stream but aren't comfortable buying junk bonds. A fund that falls within the long-term, medium-quality square might be the answer. You can find the style box for all bond funds on their Morningstar fund reports.
The basic format of the style box looks like this:
