Morningstar has made additions to classification system for mutual funds and ETFs, a move company executives said was made in response to the changing landscape and increased use of commodity funds.

As of June 30, the research firm added a commodities broad asset class to the existing set of six broad asset classes (U.S. Stock, International Stock, Taxable Bond, Municipal Bond, Balanced and Alternatives). Six commodities categories were also created to fall under the broader commodities class umbrella: broad basket, energy, precious metals, agriculture, industrial metals and miscellaneous.

Fund portfolios will be considered under their respective agriculture, energy or precious metal commodity classes if they invest directly in the physical assets or commodity-linked derivative instruments. Broad basket funds invest in a diversified basket of commodity goods, and miscellaneous funds invest in a commodity that does not fall under an existing commodity category. The Morningstar Long-Only Commodity Index will serve as the benchmark for the new commodity broad asset class.

The MFWire spoke with John Rekenthaler, vice president of research for Morningstar, who noted that many of the funds that will be recategorized under the change were in the natural resource – domestic stock fund category or equity/precious metal category. The funds are now grouped to recognize the growing influence of commodities in exchange-traded funds in particular- Rekenthaler noted that the change "really reflects the boom of commodities in the ETF buisiness", saying "we go there the fund industry goes" in order to provide funds with comprehensive peer groups that best reflect their relative performance.

According to Rekenthaler, any changes to Morningstar categories generally reflect the input of Morningstar's quantitative research group, the broader funds research group, the individual fund analysts themselves as well as comments from customers and fund managers who seek more accurate fund designations.

Morningstar also created four new sector categories: consumer discretionary, consumer staples, equity energy and industrials. These additions will bring the number of sector categories up to 11, joining seven specified sectors and one miscellaneous sector category. Funds that fall under these new categories may invest in equity securities of companies within and outside the U.S. that are engaged in the manufacture and production of each respective sector.

The changes to the category classifications are expected to have some impact on certain funds' ratings. As funds are regrouped based upon the new classification system, they may be evaluated against a new or modified group of peers.

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Company Press Release

Morningstar Announces New Commodity and Sector Fund Categories, One Broad Asset Class

CHICAGO, July 6 --Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment research, today announced it has added six new commodity categories, four new sector categories, and one broad commodity asset class to its proprietary classification system for mutual fund portfolios domiciled in the United States. These new categories and the asset class are available today.

The new commodity categories are:

* Agriculture: These funds invest in grain and feed products, oilseeds, cotton, dairy, livestock, poultry, and/or horticultural products. Investment can be made directly in physical assets or commodity-linked derivative instruments.

* Broad Basket: These funds invest in a diversified basket of commodity goods including but not limited to grains, minerals, metals, livestock, cotton, oils, sugar, coffee, and cocoa. Investment can be made directly in physical assets or commodity-linked derivative instruments, such as commodity swap agreements.

* Energy: These funds invest in oil (crude, heating and gas), natural gas, coal, kerosene, diesel fuel, and propane. Investment can be made directly in physical assets or commodity-linked derivative instruments.

* Industrial Metals: These funds invest in such industrial metals as aluminum, copper, lead, nickel, and zinc. Investment can be made directly in physical assets or commodity- linked derivative instruments.

* Miscellaneous: These funds invest in a specific commodity that does not fit into any of Morningstar's existing commodity categories and for which not enough funds exist to merit the creation of a separate category.

* Precious Metals: These funds invest in such precious metals such as gold, silver, platinum, and palladium. Investment can be made directly in physical assets or commodity-linked derivative instruments.

The new sector categories are: * Consumer Discretionary: These funds seek capital appreciation by investing in equity securities of U.S. or non-U.S. companies that are engaged in the manufacturing, sales, or distribution of consumer goods that are non-necessities.

* Consumer Staples: These funds seek capital appreciation by investing in equity securities of U.S. or non-U.S. companies that are engaged in the manufacturing, sales, or distribution of consumer staples.

* Equity Energy: These funds invest primarily in equity securities of U.S. or non-U.S. companies that conduct business primarily in energy-related industries. This includes and is not limited to companies in alternative energy, coal, exploration, oil and gas services, pipelines, natural gas services, and refineries.

* Industrials: These funds seek capital appreciation by investing in equity securities of U.S. or non-U.S. companies that are engaged in services related to cyclical industries. This includes, but is not limited to, companies in aerospace and defense, automotive, chemicals, construction, environmental services, machinery, paper, and transportation.

Morningstar also added a new broad asset class called "Commodities" to its current set of six broad asset classes: U.S. Stock, International Stock, Taxable Bond, Municipal Bond, Balanced, and Alternatives. All of the new commodities categories are assigned to this broad asset class. Morningstar has selected the Morningstar Long-Only Commodity Index as the benchmark for this new broad asset class. This index has a transparent, rules-based construction with broad diversification and history back to 1980.

"The growing number of commodity funds and their increased usage prompted us to add these new categories and the broad asset class so investors can more properly evaluate and compare funds that invest in commodities," said John Rekenthaler, vice president of research for Morningstar. Rekenthaler added, "Our 2008 acquisition Hemscott Data provided Morningstar with more than 20 years of comprehensive fundamental data on virtually all publically listed companies in the United States, Canada, the United Kingdom, and Ireland as well as a well-established equity sector structure. In order to provide one comprehensive global sector classification system, we evaluated both methodologies and combined the best features of each, resulting in the addition of the new sector categories."

As a result of the new categories, the Morningstar(TM) Rating for funds that are assigned to a different category may change because they will now be rated against a new peer group. The new category assignments will be available in Morningstar's Web-based products today, and will be rolled out in all Morningstar products by the end of July. The Morningstar Category(TM) Classifications methodology is available at http://corporate.morningstar.com/CategoryClassifications. The Morningstar Category classifications were introduced in 1996 to classify funds based on how they actually invest. Rather than assign a category to a fund based on the objective stated in its prospectus, Morningstar analyzes the fund's underlying holdings. Funds are placed in a given category based on their average portfolio statistics during the past three years.

 

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