The following is a preliminary list of category membership for the new Morningstar Canada mutual fund categories. We welcome feedback from all fund companies on this list of category membership. All feedback must be received by Sept 30th 2006. We will take this feedback into consideration before finalizing the list of category membership. The new categories will be launched in our October product release. Any feedback received after the deadline will be incorporated the following month.
It is important to remember that funds are not simply assigned to categories based on the strict category definitions. The stated category definitions merely serve as a guideline to help assign funds to categories. Morningstar's analyst team determines the final category membership.
The Morningstar categories are in some ways a significant departure from the historical category schema; both in definition and process. We recognize that some fund companies will choose to manage their funds to conform to the new category rules, and that portfolio managers who choose to do so will require time to adjust their portfolios. Thus we have been more lenient with category membership decisions during the initial categorization process than we will be heading forward.
For example, a Portfolio fund that claims to be Canadian but falls just shy of Morningstar's Canadian Portfolio (75% Canada) category will likely be placed in the Canadian Portfolio category despite not meeting the stated limit. We will then monitor this fund closely on an ongoing basis. If it continues to violate the category definition it will be removed from that category.
Another caveat concerns Portfolio funds. The Morningstar Portfolio categories distinguish between those funds that maintain a fixed asset allocation and those that do not. We make this distinction by examining the fund's stated objective and its historical holdings. A fund that does not maintain a fixed asset mix will be put into either the Canadian or Global Portfolio category. Those funds that do maintain a constant asset allocation will be subdivided according to their bias or "tilt". Generally speaking we believe a 5% deviation in either direction from the fund's target asset allocation would still meet the definition of a constant asset mix.
In order to facilitate this distinction Morningstar will begin collecting new data on Portfolio funds. In short, we will ask each company whether their portfolio funds maintain a fixed asset mix. Tests will also be done on a fund's historical holdings to verify these claims. Historical holdings alone do not tell the whole story since many tactical funds may remain stable for long periods of time before making changes in their asset allocation. The fund's stated intention will help us to categorize these Portfolio funds.
Lastly, it is important to note that there are a minority of funds for which we do not receive holdings information. In many cases we have scoured public documents to determine these funds' categorizations. However, in some instances there was not enough information available to make a decision on where to place these funds. In these instances we have opted to place them in the specialty category until we can determine exactly what these funds own.
The Morningstar categories represent a vast improvement over the current category schema. The initial categorization of over 5000 funds has been a time-consuming and tedious task to say the least. With so many funds to classify, there are bound to be some mis-steps in the process. This is why we are publishing this list of category membership before making our final decisions. We expect that with each passing category review, the category membership should only improve.