Construction Rules for the Morningstar Global ex-us Factor Tilt Index Family

Transcription

1 ? For Professional Use Only Construction Rules for the Morningstar Global ex-us Factor Tilt Index Family Morningstar Developed Markets ex-us Factor Tilt Index SM Morningstar Emerging Markets Factor Tilt Index SM Morningstar Indexes June 2017 Contents 1 Overview 2 Index Construction 2.1 Assigning Stocks to the Index 2.2 Index Weighting 3 Index Maintenance and Calculation 3.1 Index Maintenance and Corporate Action Treatment 3.2 Index Calculation and Price Data Overview The Morningstar Global ex-us Factor Tilt Index series, including the Morningstar Developed Markets ex- US Factor Tilt Index and Emerging Markets Factor Tilt Index, measure the performance of global equity markets with increased exposure toward small-capitalization and value stocks. These stocks have an overweighting in the index compared with their weight in a corresponding free-float, marketcapitalization-weighted index. Likewise, large-cap or growth stocks have underweighting compared with a standard market-capitalization weighting. Index Inception Date and Performance Inception Date The inception date of the indexes is September 12, 2012, and the performance inception date of the indexes is December 21, 2001, when the first back-tested index value was calculated. 4 Methodology Review and Index Cessation Policy 5 Data Correction and Precision 5.1 Intraday Index Data Corrections 5.2 Index-Related Data and Divisor Corrections 5.3 Computational and Reporting Precision 6 Appendixes 6.1 Glossary 6.2 Measuring Stock Value Score and Style Assignment 6.3 Determining Value and Size Tilts 7 About Morningstar

2 Page 2 of 17 Index Construction Assigning Stocks to the Index Selection Universe At each reconstitution, securities for the Morningstar Developed Markets ex-us Factor Tilt Index are derived from the Morningstar Developed Markets ex-us Index, while securities in the Morningstar Emerging Markets Factor Tilt Index are derived from the Morningstar Emerging Markets Index. For more details on the construction of these indexes, refer to the Morningstar Global Markets ex-us Index Family rulebook. Morningstar Global ex-us Factor Tilt Indexes Assigning Value Scores and Stock Style A stock s value orientation reflects the price investors are willing to pay for a share of some combination of the stock s prospective earnings, dividends, sales, cash flow, and book value. Value orientation is determined using the following three steps: Calculate five prospective yields (earnings, dividend, cash flow, revenue, and book value for each stock within each of the cap indexes. Compute a cumulative value score for each security. The total free-float market capitalization of a given size segment is divided equally among the three style segments. For complete rules on assigning value and style scores, refer to Appendix 2. Applying Factor Tilt The purpose of these indexes is to allow investors to tilt their global equity exposure toward a particular investment style while maintaining a low-turnover core portfolio. To arrive at the small-value tilt, the market is divided into four asymmetric quadrants. The value and size tilts are applied across the four quadrants, specifically overweighting the small-value quadrant relative to the other quadrants. With this approach, relative market weighting is maintained within each quadrant, resulting in a low-turnover core portfolio that captures long-term small-value premiums. For more details on tilt factor calculations, refer to Appendix 3. Number of Stocks The number of stocks in the index is subject to the selection and eligibility criteria at the time of reconstitution. Index Weighting The index is float market-capitalization-weighted adjusted for tilt. For more details, refer to the Morningstar Indexes Calculation Methodology rulebook. Index Maintenance and Calculation

3 Page 3 of 17 Scheduled Maintenance The index is reconstituted semiannually and implemented after the close of business on the third Friday of June and December and is effective the following Monday. If Monday is a holiday, reconstitution is effective on the immediate following business day. The market data used for reconstitution is as of the last trading day of April and October. The index is rebalanced quarterly and implemented after the close of business on the third Friday of March, June, September, and December and is effective the following Monday. If Monday is a holiday, rebalance is effective on the immediate following business day. The market data used for rebalance is as of the last trading day of February, April, August, and October. Refer to Appendix 1 for details on reconstitution and rebalancing. Corporate Action The treatment of corporate actions can be found in the Morningstar Indexes Corporate Actions Methodology rulebook.

4 Page 4 of 17 Index Calculation and Price Data Details about index calculations and price data can be found in their respective rulebooks: Morningstar Indexes Calculation Methodology and Equity Closing Prices Used for Index Calculation. Methodology Review and Index Cessation Policy The index methodology is continually reviewed to ensure it achieves all stated objectives. These reviews take into account corporate action treatment, selection, and maintenance procedures. Subscribers to the index will be notified before any methodology changes are made. For more details, refer to the Morningstar Index Methodology Change Process. Morningstar also notifies all subscribers and stakeholders of the index that circumstances might arise that require a material change to the index, or a possible cessation of the index. Circumstances that could lead to an index cessation include, but are not limited to, market structure change, product definition change, inadequate supply of data, insufficient revenue associated with the index, insufficient number of clients using the index, and/or other external factors beyond the control of the Morningstar Index Committee. Because the cessation of the index or benchmark index could disrupt subscriber products that reference this index, all subscribers are encouraged to have robust fallback procedures if an index is terminated. For more details, refer to the Morningstar Index Cessation Process. Data Correction and Precision Intraday Index Data Corrections Commercially reasonable efforts are made to ensure the accuracy of data used in real-time index calculations. If incorrect price or corporate action data affect index daily highs or lows, they are corrected retroactively as soon as is feasible. Index-Related Data and Divisor Corrections Incorrect pricing and corporate action data for individual issues in the database will be corrected upon detection. In addition, an incorrect divisor of an index, if discovered within five days of its occurrence, will always be fixed retroactively on the day it is discovered to prevent an error from being carried forward. Commercially reasonable efforts are made to correct an older error subject to its significance and feasibility. For more details, refer to the Recalculation Guidelines. Computational and Reporting Precision For reporting purposes, index values are rounded to two decimal places and divisors are rounded to appropriate decimal places.

5 Page 5 of 17 Appendixes Appendix 1: Glossary Terms Reconstitution Rebalance Description Each reconstitution involves the following: Updating the global market investable equity universe. Reviewing the economic segment- and country-level size segment breakpoints. Assigning companies to capitalization bands taking into account the buffer zones. Changes in index shares (free float, total shares outstanding, index-specific adjustment factor of each constituent. Each rebalancing involves the following: Changes in index shares (free float, total shares outstanding, index-specific adjustment factor of each Constituent. Addition of U.S. spin-offs/ipos to the global markets index (exclude for ex-us index rulebooks. Appendix 2: Measuring Stock Value Score & Style Assignment Measuring Stock Value Orientation Basic Concepts Value orientation is calculated within capitalization classes, or cap bands. That is, a stock is assigned to a cap band before its value orientation is determined. Two stocks that have similar financial ratios but are in different cap bands may be given different value orientation assignments. A high value-orientation score (as defined below indicates that a stock's price is relatively low given the anticipated per-share earnings, book value, revenue, and so forth that the stock provides to investors. A high price relative to these measures indicates that a stock's value orientation is weak, but does not necessarily mean that the stock is growth-oriented. Terminology and Notation The following short forms relate to the five factors used to determine a stock's value score: p = current stock price per share, from the most recent month-end e 1/p = projected earnings yield (uses third-party estimates for e1, where available b 1/p = book value yield (projected based on historical data r 1/p = revenue yield (projected based on historical data c 1/p = cash flow yield (projected based on historical data d 1/p = dividend yield (projected based on historical data The following short forms relate to a company's fundamental data(earnings per share, for example:

6 Page 6 of 17 e 1 = forecast earnings per share for the current fiscal year e 0 = EPS for the most recently reported fiscal year e 1 = EPS for the fiscal year prior to e 0 e 2 = EPS for the fiscal year prior to e 1 e 3 = EPS for the fiscal year prior to e 2 e 4 = EPS for the fiscal year prior to e 3 As needed to determine the stock's value score, the same notations are used for cash flow per share, revenue per share, book value per share, and dividends per share except that "c," "r," "b, or "d," respectively, are substituted for "e" in the example above. Basic Process A stock s value orientation reflects the price investors are willing to pay for a share of some combination of the stock s prospective earnings, book value, revenue, cash flow, and dividends. Morningstar measures a stock s value orientation in relation to its scoring group (groups based on style zone and size. Value orientation is determined using the following three steps: Calculate up to five prospective yields (e 1/p, b 1/p, r 1/p, c 1/p, and d 1/p for each stock. Calculate a float-weighted percentile score (0-100 for each available yield factor for each stock within each scoring group. Calculate the overall value score (0-100 for each stock. This is a weighted average of the individual percentile scores for each of the five value factors. The weights for this average are described below. The weighted average score represents the strength of the stock s value orientation. Details of each of these steps are provided below. Calculating Prospective Yields As many as possible of e 1/p, b 1/p, r 1/p, c 1/p, and d 1/p are calculated for each stock. Because p is known, the method used to forecast e 1, b 1, etc., is key. If a positive third-party forecast of e 1, b 1, r 1, c 1, or d 1 is available, it is used to calculate the prospective yield. (Morningstar only uses third-party forecasts for e 1. If e 1, b 1, r 1, c 1, or d 1 is forecast to be negative by a third party, or if e 0, b 0, r 0, c 0, or d 0 is negative and no third-party forecast is available, prospective yield on that factor is excluded for that stock. If no third-party forecast is available and e 0, b 0, r 0, c 0, or d 0 is positive, then forecast values are calculated. The relationship between prospective and current EPS is straightforward: e 1 = e 0 (1 + g(e 1 Because e 0 is known, only g(e 1 must be calculated to provide a forecast of e 1.

7 Page 7 of 17 Also, g(e 1 is calculated from historical earnings information. First calculate as many as possible of four periodic growth rates: g(e 4 = ( e e 4 g(e 3 = ( e 0 e 3 g(e 2 = ( e 0 e g(e 1 = ( e 0 e 1 1 Where e 1, e 2, e 3, or e 4 is negative, no growth rate is calculated using that data point. Availability for restated cash flow is limited to three years. When as many as possible of the growth rates defined above have been calculated, average the results: g(e 1 = Average[g(e 4, g(e 3, g(e 2, g(e 1 ] Thus: Estimated earnings growth g(e 1 and forecast earnings (e 1 are calculated only for stocks where e 0 is a positive number. In calculating g(e 1, recent growth rates are included in more of the averaged terms than are older growth rates; recent growth rates are therefore weighted more heavily than older growth rates. If third-party forecasts are unavailable, e 1/p, c 1/p, r 1/p, and b 1/p are calculated in the same way. Dividend yield is calculated by using dividends announced by the company for the latest fiscal year end divided by price. If d 1/p is the only available forecast yield figure, the stock is not given a value assignment. Calculating Percentile Scores for Each Value Factor When one or more of e 1/p, b 1/p, r 1/p, and c 1/p values have been calculated, with or without d 1/p, each stock is assigned a float-weighted percentile score for each relevant factor. The percentile scores are calculated within each stock s scoring group. To calculate an earnings yield score (0-100 for each stock in a scoring group: Rank all stocks in the scoring group by e 1/p yields in ascending order, Determine the total float capitalization of all stocks in the group. Float is defined as the number of shares issued and outstanding, less any shares owned by insiders, 5% owners, and Rule 144 shares,

8 Page 8 of 17 Starting with the lowest observations, trim all stocks that sum up to 5% of float. Then, trim 5% of the float from the highest observations. When a stock straddles the 5 th percentile point or 95 th percentile point, remove it from the sample, Calculate the float-weighted average e 1/p for the remaining stocks, Add the trimmed stocks back to the sample. Calculate the ratio of each stock s e 1/p to the float-weighted average e 1/p, Assign each stock to an e/p bucket as follows: If the stock s e 1/p is equal to or less than 0.75 times the float-weighted average e 1/p (the lower value cutoff, the stock is assigned to the low e/p bucket. Or, if the stock s e 1/p is equal to or less than the float-weighted average e 1/p, the stock is assigned to the mid-minus e/p bucket. Or, if the stock s e 1/p is equal to or less than 1.25 (the upper value cutoff times the floatweighted average e 1/p, the stock is assigned to the mid-plus e/p bucket. Or, the stock is assigned to the high e/p bucket. When each stock has been assigned to an e/p bucket, it is then scaled relative to other stocks in the same bucket. The low e/p bucket is used as an example here: Order the stocks within the low e/p bucket by their raw e 1/p scores, from lowest to highest. Within the low e/p bucket, assign each stock a value equal to the cumulative float represented by that stock and all stocks with a lower e 1/p. Thus, the stocks in the low e/p bucket have values ranging from (the stock with the lowest e 1/p in the low e/p bucket to 100 (the stock with the highest e 1/p in the low e/p bucket. Where two or more stocks have the same e 1/p, they are assigned a value that represents the cumulative float of all stocks with a lower e 1/p plus one half of the total float of the stocks that share the same e 1/p. Rescale the scores in the low e/p bucket between and Repeat the four steps immediately above for each of the mid-minus, mid-plus, and high e/p buckets; rescale the values as follows: Bucket Minimum Score Maximum Score Low e/p Mid-minus e/p Mid-plus e/p High e/p All of the steps in this section are then repeated for each of b 1/p, r 1/p, c 1/p, and d 1/p. For stocks that do not pay dividends, 0% dividend yield is considered a valid data point and is given a dividend yield score. Repeat all of the steps above for each scoring group. For financial stocks, price/cash flow is not used for the value factor calculation because cash flow from operations data is not meaningful for banks and insurance companies.

9 Page 9 of 17 All of the steps in this section are then repeated for each of c 1/p, r 1/p, b 1/p, and d 1/p. Calculating Overall Value Orientation Scores When all of the five value factors have been scored from 0-100, a weighted average overall value score is calculated for each stock. If available, e/p scores are assigned a weight of 50% in the overall value score; each of the other value factors is assigned an equal share of the remaining weight (either 50% or, if e/p is unavailable, 100%. For example, if all five value factors are available, the weights are: e/p b/p r/p c/p d/p Overall Value Scores 50% 12.5% 12.5% 12.5% 12.5% Stock A Or, for example, if b/p is missing, the weights are: e/p b/p r/p c/p d/p Scores 50% 16.7% 16.7% 16.7% Or, for example, if e/p and b/p are both missing, the weights are: e/p b/p r/p c/p d/p Scores 33.3% 33.3% 33.3% If only a dividend yield forecast, or no information, is available for a given stock, the stock is not given an overall value orientation score. Assigning Stocks to a Style Factor Index Assigning Large-Cap Stocks to a Style Factor Index Each index constituent within the Developed and Emerging Markets Index that is assigned a large capitalization band is then assigned to the Large Factor Value, the Large Factor Core, or the Large Factor Growth Index. Style assignment is based on the stock s style orientation score and the threshold levels between value and core and core and growth. Determining a Stock s Style Orientation Score Each stock is assigned a value orientation between zero and 100. See the "Measuring Stock Value Orientation" section for how stock style is scored. Determining Threshold Levels Value, core, and growth factor indexes are each targeted to account for one third of the total capitalization of each capitalization group. This is referred to as the target weight. Within each capitalization group, the value and growth thresholds are calculated as follows: Rank stocks within the Large Cap Index by their value orientation score in ascending order. Calculate cumulative free-float market cap for stocks in the Large Cap Index.

10 Page 10 of 17 The value threshold is equal to the stock s value score where cumulative free-float market cap is equal to or just greater than the target weight for the Large Factor Value Index. The growth threshold is equal to the stock s style score where the cumulative free-float market cap is equal to or just greater than the target weight for Large Factor Value Index + Target Weight for Large Factor Core Index Style Assignment and Buffering The index constituents within the Large Cap Index are ordered by their style orientation score in ascending order. The percentage of total cap index free float represented by stocks with a score less than or equal to the value threshold amount is calculated. This percentage is the current value threshold, or CVT. The percentage of total cap index free float represented by stocks with a score less than or equal to the growth threshold amount is calculated. This is the current growth threshold, or CGT. Selecting by style score in ascending order, the stocks that, in aggregate, account for the CVT-5% of the free float of the cap index are assigned to the Large Value Index. Selecting by score in ascending order, the stocks that fall between CVT-5% and CVT are classified as either value or core. Among these, stocks that were classified as large core and fell between the CVT and the CGT or stocks that were classified as large growth at the previous reconstitution date are reassigned to the Large Core Index. The rest are assigned to the Large Value Index. Selecting by score in ascending order, the stocks that fall between CVT and CVT+5% are classified as either value or core. Among these, stocks that were classified as large value and fell below the CVT at the previous reconstitution date are reassigned to the Large Value Index. The rest are assigned to the Large Core Index. Selecting by score in ascending order, the stocks that fall between CVT+5% and CGT-5% are assigned to the Large Core Index. Selecting by score in ascending order, the stocks that fall between CGT-5% and CGT are classified as either core or growth. Among these, stocks that were classified as large growth and fell above the CGT at the previous reconstitution date are reassigned to the Large Growth Index. The rest are assigned to the Large Core Index. Selecting by score in ascending order, the stocks that fall between CGT and CGT+5% are classified as either core or growth. Among these, stocks that were classified as large core and fell between the CVT and the CGT or stocks that were classified as large value at the previous reconstitution date are reassigned to the Large Core Index. The rest are assigned to the Large Growth Index. Selecting by score in ascending order, the stocks that fall beyond the CGT+5% are assigned to the Large Growth Index. Assigning Mid- and Small-Cap Stocks to a Style Index The process described above for assigning stocks to large style indexes is also used for mid- and smallstyle indexes.

11 Page 11 of 17 Appendix 3: Determining Value and Size Tilts Factor Tilt Weights of each constituent in a given index are tilted toward small-/micro-cap and value, a part of the market that has historically outperformed the total U.S. market over long periods of time. The weight adjustment factors are determined as follows: Let: W AB= the market weight of style index AB as a fraction of the Morningstar Developed ex-us or Emerging Markets Index, A = L, M, or S; B = V. C, or G. By definition: W AB = 1 A {L,M,S,} B {V,C,G} For A = L, M, and S, is defined: W A = W AB B {V,C,G} Similarly, for B = V, C, and G, is defined: W B = W AB A {L,M,S} We also divide the market into asymmetric quadrants as follows: W I = W LC + W LG + W MC + W MG Ι = W LV + W MV

12 Page 12 of 17 ΙΙ = W SV V = W SC + W SG A parallel notation is used for the portfolio by replacing uppercase W with lowercase w. For example, W MC is the allocation to the Mid-Cap Core Index, W M is the mid-cap allocation, and W I is the allocation to quadrant I. The value tilt is defined as a number between 0 and 1 that represents how much the portfolio is tilted toward value. The formula for the value tilt is: φ X = w V W V W G w G Similarly, we define the size tilt as a number between 0 and 1 that represents how much the portfolio is tilted toward small-cap. The formula for the size tilt is: φ Y = w S W S W L w L Problem and Solution Value and size tilt targets are denoted as X and Y, respectively. To reach these targets, weight is allocated across the quadrants. It is assumed that within each quadrant, relative market weighting is maintained. Therefore: w LV = W LV Ι w ΙΙ w LC = W LC w Ι w LG = W LG w Ι w MV = W MV w Ι ΙΙ w MC = W MC w Ι w MG = W MG w Ι w SV = w ΙΙΙ w SC = W SC V w ΙV

13 Page 13 of 17 w SG = W SG V w ΙV Hence, we need to determine four values; namely, w I, w II, w III, and w IV. We have three conditions to impose: The quadrant weights must sum to one: Q e (Ι,ΙΙ,ΙΙΙ,ΙV w Q = 1 The value tilt target must be met: φ X = θ X The size tilt target must be met: φ Y = θ Y Because the three conditions are linear, three of the four quadrant weights can be expressed as a linear function of the remaining one. Express w ΙΙ and w ΙV as functions of w ΙΙΙ as follows: w ΙΙ = α ΙΙ + β ΙΙ w ΙΙΙ w ΙV = α ΙV + β ΙV w ΙΙΙ Whereα ΙΙ,β ΙΙ,α ΙV, and β ΙV are coefficients to be determined. Since the quadrant weights must sum to 1: w Ι = 1 w ΙΙ w ΙΙΙ w ΙV Thus, we can write: w Ι = α Ι + β Ι w ΙΙΙ Where: α Ι = 1 α ΙΙ α ΙV β Ι = (β ΙΙ β ΙV For completeness, is defined: α ΙΙΙ =0 β ΙΙΙ = 1 From conditions (1, (2, and (3 the following pair of linear equations is derived in w ΙΙ and w ΙV

14 Page 14 of 17 a 11 w ΙΙ + a 12 w ΙV = θ Y + W S W LC + W LG (1 + W S W LC + W LG w W L W L ΙΙ Ι a 21 w ΙΙ + a 22 w ΙV = θ X + W V W MG + W LG (1 + W V W MG + W LG w W G W G ΙΙ Ι Where: a 11 = W S ( W LC + W LG W LV W L Ι a 12 = W S W L W LC + W LG + 1 a 21 = W V W G W MG + W LG + 1 a 22 = W V ( W MG + W LG W SG W G V The solution to this pair of equations is: w ΙΙ = A 11 (θ Y + W S W LC + W LG + A W 12 (θ X + W V W MG + W LG L W G [A 11 (1 + W S W LC + W LG + A W 12 (1 + W V W MG + W LG ] w L ΙΙ G V = A 21 (θ Y + W S W LC + W LG + A W 22 (θ X + W V W MG + W LG L W G [A 21 (1 + W S W LC + W LG + A W 22 (1 + W V W MG + W LG ] w L ΙΙ G Where: A 11 = A 12 = a 22 a 11 a 22 a 21 a 22 a 12 a 11 a 22 a 21 a 22 A 21 = a 21 a 11 a 22 a 21 a 22 a 11 A 22 = a 11 a 22 a 21 a 22

15 Page 15 of 17 Hence, it follows that: α ΙΙ = A 11 (θ Y + W S W LC + W LG + A W 12 (θ X + W V W MG + W LG L W G β ΙΙ = [A 11 (1 + W S W LC + W LG + A W 12 (1 + W V W MG + W LG ] L W G α ΙV = A 21 (θ Y + W S W LC + W LG + A W 22 (θ X + W V W MG + W LG L W G β ΙV = [A 21 (1 + W S W LC + W LG + A W 22 (1 + W V W MG + W LG ] L W G We have now reduced the problem of selecting a tilted portfolio to the choice of a single variable: namely, w III. However, the choice of w III is limited by the constraint that all of the quadrant weights be between 0 and 1. Since we now can express each quadrant weight as a linear function of w III, we can find the lower and upper limits on w III as follows: For each quadrant Q = I, II, III, IV, calculate: L Q = min ( α Q, 1 α Q β Q β Q H Q = max ( α Q, 1 α Q β Q β Q Then calculate: w min ΙΙΙ = w max ΙΙΙ = max Qε{Ι,ΙΙ,ΙΙΙ,ΙV } L Q min Qε{Ι,ΙΙ,ΙΙΙ,ΙV } H Q The first candidate for w ΙΙΙ is the one that minimizes the Euclidean distance between the investor s quadrant allocations to the market quadrant allocations. The problem is: min (α Q +β Q w ΙΙΙ W Q 2 ΙΙ Qε{Ι,ΙΙ,ΙΙΙ,ΙV} The solution to this problem is: w ΙΙΙ = (W Q α Q β Q (β Q 2 Qε{Ι,ΙΙ,ΙΙΙ,ΙV} Qε{Ι,ΙΙ,ΙΙΙ,ΙV}

16 Page 16 of 17 If w min ΙΙΙ w ΙΙΙ w max ΙΙΙ, the problem is solved. Otherwise, there are two remaining candidates; min namely w ΙΙΙ and w max ΙΙΙ. Each candidate is evaluated by the Euclidean distance between the resulting portfolio and to the market-weighted portfolio of the nonzero quadrants of the candidate solution. Value and size tilt targets are denoted as X and Y, respectively. To determine the size and value target tilt factors ( X and Y for the Morningstar Developed Factor Tilt Index, the three-factor Fama French (FF model was considered. The three factors are: excess return on the developed market portfolio; SMB, which is the difference between the returns of a small-cap developed-market portfolio and the large-cap developed-market portfolio; and HML, which is the difference in returns between a high book/market and low book/market developed market portfolio. Through this statistical context, the linear regression results of monthly returns for 25 distinct developed market portfolios were considered. To construct the 25 developed portfolios, first 25 developed ex-us portfolios were constructed by incrementing the size and value tilt factors by 0.1. Recall that a size and value tilt of 0 results in no tilt that is, a float market-cap-weighted portfolio. Next, the 25 developed ex- U.S. portfolios were combined with the Morningstar US Market Factor Tilt Index assuming a 60% allocation to U.S. and 40% allocation to developed ex-u.s. markets, rebalanced quarterly. A size tilt factor of 0.20 and value tilt factor of 0.1 results in FF regression coefficients (the betas over the 11-plus year history of SMB 0.14 and HML of These coefficients were selected as the optimal strategy for this portfolio tilted toward small and value. At each reconstitution, the Morningstar Index Committee will review the long-term explanation of portfolio exposures within the context of the FF regression to ensure the tilt factors continue to be appropriate.

17 Page 17 of 17 About Morningstar, Inc. Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 510,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 17 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries. About Morningstar Indexes Morningstar Indexes combine the science and art of indexing to give investors a clearer view into the world s financial markets. Our indexes are based on transparent, rules-based methodologies that are thoroughly back-tested and supported by original research. Covering all major asset classes, our indexes originate from the Morningstar Investment Research Ecosystem our network of accomplished analysts and researchers working to interpret and improve the investment landscape. Clients such as exchangetraded fund providers and other asset management firms work with our team of experts to create distinct, investor-focused products based on our indexes. Morningstar Indexes also serve as a precise benchmarking resource. Morningstar Index Committee The Morningstar Index Committee is currently comprised of senior officials who possess the appropriate levels of knowledge in relation to Indexes. A wide array of business groups are represented to allow for a broad voice to be heard and for a wider view to be expressed in evaluating all subjects brought up during Committee meetings. The Committee seeks to create indexes of the highest quality that meet the recognized qualities of a good benchmark. For More Information For any queries, reach out to us via our communication page.? 22 West Washington Street Chicago, IL USA 2016 Morningstar. All Rights Reserved. Any matter arising from undocumented events will be resolved at the discretion of Morningstar Index Committee. The information in this document is the property of Morningstar, Inc. Reproduction or transcription by any means, in whole or part, without the prior written consent of Morningstar, Inc., is prohibited. While data contained in this report are gathered from reliable sources, accuracy and completeness cannot be guaranteed. All data, information, and opinions are subject to change without notice. This document may contain back-tested or simulated performances and the subsequent results achieved by the investment strategy may be materially different.