Fact Sheet User Guide

Transcription

1 Fact Sheet User Guide The User Guide describes how each section of the Fact Sheet is relevant to your investment options research and offers some tips on ways to use these features to help you better analyze investment options. A B C D H E F G I J L K 1 PQ2979 Fact Sheet User Guide

2 A Investment Strategy It states the objective of the investment, and how the mangers intend to invest to achieve this objective. B Performance History The investment s total return is shown year-to-date, as well as for the preceding 1 year. Also shown are annualized returns for the past 3 years, 5 years, and 10 years when applicable. Investments without a 10-year performance return will show a since-inception return. To provide you with a point of comparison for your investment option s performance, the return of the investment option s index and category are shown for the same time periods. Morningstar assigns each investment option to one of 62 categories, based on the stocks and bonds that have found their way into the portfolio over the past three years. Of course, all return information is based on historical data and cannot guarantee future performance. C Modern Portfolio Theory (MPT) Statistics Alpha, beta, and r-squared are components of Modern Portfolio Theory (MPT), a set of academic methods for assessing the risk of a investment option, relative to a benchmark. The three statistics should be used in combination with each other. The section below explains how the statistics are calculated. Alpha: Alpha measures the difference between an investment s actual returns and its expected performance, given its level of market-related risk (as measured by beta). A positive alpha figure indicates the investment has performed better than its beta would predict. Beta: Beta is a measure of an investment s sensitivity to market movements, as defined by a benchmark index. It measures the relationship between an investment s excess return over 90-day Treasury-bills and the excess return of the benchmark index. By definition, the beta of the benchmark is An investment with a 1.10 beta has performed 10% better than its benchmark index (after deducting the T-bill rate) in up markets and 10% worse in down markets, assuming all other factors remain constant. A beta of 0.85 indicates that the investment option has performed 15% worse than the index in up markets and 15% better in down markets. A low beta does not imply that the investment has a low level of volatility; rather, it means only that the investment s market-related risk is low. R-squared: R-squared Figures range from 0 to 100, and reflect the percentage of an investment s movements that are explained by movements in its benchmark index. An r-squared of 100 means that all movements of an investment are completely explained by movements in the index. Thus, index investment options that invest only in S&P 500 stocks will have an r-squared very close to 100. Conversely, a low r-squared indicates that very few of the investment s movements are explained by movements in its benchmark index. R-squared is used to determine the significance of a particular beta or alpha. Generally, a higher r-squared will indicate a more reliable beta figure. Standard Deviation: Standard deviation is a statistical measure of the range of an investment s performance. When an investment has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility. The standard deviation figure provided here is an annualized statistic based on 36 monthly returns. By definition, approximately 68% of the time, the total returns of any given investment are expected to differ from its mean total return by no more than plus or minus the standard deviation figure. Ninety-five percent of the time, an investment s total returns should be within a range of plus or minus two times the standard deviation from its mean. These ranges assume that an investment s returns fall in a typical bellshaped distribution. In any case, the greater the standard deviation, the greater the investment s volatility. For example, an investor can compare two investment options with the same average monthly return of 5.0%, but with different standard deviations. The first investment has a standard deviation of 2.0, which means that its range of returns for the past 36 months has typically remained between 1% and 9%. On the other hand, assume that the second investment has a standard deviation of 4.0 for the same period. This higher deviation indicates that this investment has experienced returns Fluctuating between 3% and 13%. With the second investment option, an investor might expect greater volatility. Mean: The mean is the figure that represents the annualized trailing, three-year return figure for the time period being measured. This is known as a geometric mean. Note that Morningstar uses the arithmetic mean of an investment option rather than geometric mean when calculating standard deviation. An arithmetic mean 2 PQ2979 Fact Sheet User Guide

3 represents the annualized average monthly return of the investment option. Please note this distinction when looking at an investment s standard deviation. Sharpe Ratio: The Sharpe ratio is a risk-adjusted measure developed by Nobel Laureate William Sharpe. It is calculated using standard deviation and excess return to determine reward per unit of risk. First, the average monthly return of the 90-day Treasury bill (over a 36- month period) is subtracted from the investment option s average monthly return. The difference in total return represents the investment option s excess return beyond that of the 90-day Treasury bill, a risk-free investment. An arithmetic annualized excess return is then calculated by multiplying this monthly return by 12. To show a relationship between excess return and risk, this number is then divided by the standard deviation of the investment option s annualized excess returns. The higher the Sharpe ratio, the better the investment option s historical risk-adjusted performance. G Net Assets The history section lists the investment option s assets, both for the year-end and as of the most-recent quarterend. The figure is recorded in millions of dollars and represents the investment s total asset base, net of fees and expenses. H Other Information This section shows the name of the person who determines which stocks or bonds belong in the investment portfolio (the portfolio manager) and how long that manager has been working on the portfolio. It also shows how long the portfolio has been in existence and the name of the management company. I Style Box The Morningstar Style Box is a visual tool that helps investors see past confusing investment names and descriptions to better understand the investment style of investments. D Total Return Percentile Rank Morningstar lists total return percentile rankings for each investment option as of the end of the current period and for the preceding 10 calendar year-end periods. The percentile ranking compares the investment option s total return for that period against the same investment category (Total Rtn % Rank Cat) in the history section. 1 is the highest or best percentile ranking and 100 is the lowest or worst. E Expense Ratio The expense ratio applies to the fee charged by an investment. It is the amount of money, expressed as a percentage, taken out each year to pay for the operation and management of an investment portfolio. Total Investment Expense: Total Investment Expense is the amount of money, expressed as a percentage, deducted for the costs of managing the Separate Account, and where applicable, fees for administrative services, agent compensation, and any operating expenses of an underlying investment. F Turnover rate A proxy for how frequently a manager has traded his or her portfolio in the past year. We assign each investment into one of our nine Style Box squares by analyzing its portfolio and determining the best fit. Things to remember about the Morningstar Style Box: Risk increases as you move down and to the right of the Morningstar Style Box. Don t put all your eggs in one basket. The returns of investments from different parts of the Morningstar Style Box probably won t move in the same direction at the same time. By combining investments from different parts of the Morningstar Style Box, your portfolio s overall returns will likely be more stable. What the Morningstar Style Box does: It paints a picture of what s in an investment s portfolio. Are the companies large or small? Are the stocks cheap or expensive? Do the bonds have long or short maturities? Are they of high or low quality? The Morningstar Style Box also provides a basis for our domestic stock investment categories. Similar investments are categorized together, then rated on their ability to balance risk and reward relative to other investments in that same, fairly narrow category. 3 PQ2979 Fact Sheet User Guide

4 Domestic Equity: To classify an offering s investment style, Morningstar considers two components: market capitalization on the vertical axis and valuation on the horizontal axis. The vertical axis of the style box defines three capitalization bands small, mid, and large. The horizontal axis defines three style groups. Two of these groups, value and growth, are common to both stocks and funds. However, for stocks, the central column of the style box represents the core style (those stocks for which neither value or growth characteristics dominate); for funds, it represents the blend style (a mixture of growth and value stocks or mostly core stocks). Valuation: Style box assignments start at the individual stock level. Morningstar determines the investment style of each stock in its database. The style attributes of individual stocks are then used to determine the investment styles of domestic-stock funds. The scores for a stock s value and growth characteristics determine its horizontal placement. In determining the score for each stock, five value factors and five growth factors are considered and a weight is assigned to each one of those factors. Among value components, the price-to-projected earnings, a forward-looking measure, is given 50%; four historical measures, such as price-tobook, price-to-sales, price-to-cash-flow and dividend yield, are assigned 12.5% each. Among the growth components, the long-term projected earnings growth, another forward looking measure, is given 50% while four historical factors, including historical earnings growth, sales growth, cash flow growth and book value growth, are assigned 12.5% each. Then, value and growth characteristics for each individual stock are compared to those of other stocks within the same capitalization band, and are given scores between zero and 100. To determine the overall style score, the stock s value score is subtracted from its growth score. The resulting value can range from 100 (for very low-yield, extremely growth-oriented stocks) to 100 (particularly high yield, slow-growth stocks). A stock is classified as value if the net score equals or falls below the value threshold. It is considered growth if its score equals or exceeds the growth threshold. If the net score lies between those two thresholds, the stock is deemed core. The thresholds among value, core and growth stocks vary over time with the market. However, on average, these three stock styles each account for approximately one-third of the total free float in each capitalization band. Market Capitalization Rather than a fixed number of large-cap, mid-cap, and small-cap stocks, Morningstar uses a flexible system that controls for Morningstar Style Box Equity Bond Risk Investment Style Median Market Cap. Risk Duration Quality Value Blend Growth Short Intermediate Long Low Large-cap Value Large-cap Blend Large-cap Growth Large Low Short-term High Quality Interm-term High Quality Long-term High Quality High Moderate Mid-cap Value Mid-cap Blend Mid-cap Growth Mid Moderate Short-term Medium Quality Interm-term Medium Quality Long-term Medium Quality Medium High Small-cap Value Small-cap Blend Small-cap Growth Small High Short-term Low Quality Interm-term Low Quality Long-term Low Quality Low Within the stock grid, nine possible combinations exist, ranging from large-cap value for the safest investments to small-cap growth for the riskiest. Within the bond grid, nine possible combinations exist, ranging from short duration or maturity/high quality for the safest investments to long duration or maturity/low quality for the riskiest. 4 PQ2979 Fact Sheet User Guide

5 the overall movement of the market. Large-cap stocks account for approximately the top 70% of the cap-italization of Morningstar domestic stock universe; mid-cap stocks represent the next 20%; and small-cap stocks account for the balance. A fund s market capitalization is defined as the geometric mean of the market capitalization for the stocks it owns. The geometric mean better identifies a fund s center of gravity. In other words, it gives a more accurate insight into how market movements might have affected the portfolio. International equity: Style boxes for international-stock offerings are computed differently than for domestic-stock offerings. Because earnings are reported in different ways around the world, Morningstar uses price/cash flow rather than price/earnings for international style boxes. International investments price/cash flow and price/book scores are viewed in relation to the MSCI EAFE index as modeled by Eclipse eafe Index Fund, an international-stock index fund. If the sum of the price/cash flow score and price/book score equals or exceeds 2.25, the investment is categorized as growth. If the combined score equals or falls below 1.75, the investment is considered value. If the combined score is between 1.75 and 2.25, the investment is categorized as blend. Currently, we classify international offerings as large, medium, or small cap based on fixed market-cap boundaries. If the median market cap is above $5 billion, the investment is classified as large cap. If the median market cap is $1 billion to $5 billion, the investment is classified as medium cap. If the median market cap is below $1 billion, it is classified as small cap. Bond: The fixed-income style box is determined by the investment holdings interest-rate sensitivity and credit quality. Morningstar splits fixed-income mutual funds into three duration groups: short, intermediate, and long term (maturity is used for variable- annuity funds) and three credit-quality groups: high, medium, and low quality. These groupings display a portfolio s effective duration and credit quality to provide an overall representation of the fund s risk, given the sensitivity to interest-rate shifts and default risk of bonds in its portfolio. Morningstar identifies investments with durations of 3.5 years or less as short term, more than 3.5 years and less than six years as intermediate term, and six years or more as long term. Investments that have an average credit rating of AAA and AA are classified as high quality, average ratings lower than aa but equal to or above BBB are medium quality, and those rated below BBB are classified as low quality. J Top Ten Holdings The top holdings are the stocks or bonds with the most influence on a portfolio s returns. Conservative portfolios typically devote no more than 3% to 4% of their assets to any one stock or bond. More-daring portfolios may devote 7% or more to one stock. Add up the weighting of the top five holdings for another measure of risk. A conservative option generally bets 15% or less on the top five holdings, while a portfolio with more than 25% in the top five may be considered aggressive. K Composition We break down the investment option s holdings into general investment classes. The pie chart shows how much emphasis is placed on stocks, bonds, or cash. We also show how much is held in foreign stocks. Investments that hold more than 10% usually carry less risk because not all of their holdings are exposed to a market. L Sector Weightings Morningstar determines how much of each stock portfolio is held in each of Morningstar's 12 major industrial sectors, which roll up into three broader categories. A portfolio with 25% or more of assets in any one sector is almost certainly taking on more risk than a portfolio that spreads itself more evenly among sectors. Fixed-income options only Average Effective Maturity: This figure takes into consideration all mortgage prepayments, puts, and adjustable coupons; it does not, however, account for call provisions. The number listed is a weighted average of all the maturities of the bonds in the portfolio, computed by weighing each maturity date (the date the security comes due) by the market value of the security. Average Effective Duration: A measure of an investment s interest-rate sensitivity the longer an investment s duration, the more sensitive the investment is to shifts in 5 PQ2979 Fact Sheet User Guide

6 interest rates. Duration is determined by a formula that includes coupon rates and bond maturities. Small coupons tend to increase duration, while shorter maturities and higher coupons shorten duration. The relationship between investments with different durations is straightforward: An investment with a duration of 10 years is twice as volatile as an investment with a five-year duration. Average effective duration incorporates call, put, and prepayment possibilities. Average Credit Quality: Average credit quality gives a snapshot of the portfolio s overall credit quality. It is an average of each bond s credit rating, adjusted for its relative weighting in the portfolio. Average Weighted Coupon %: This figure is generated from the investment s portfolio by weighting the coupon of each bond by its relative size in the portfolio. Coupons are fixed percentages paid out on a fixedincome security on an annual basis. Average Weighted Price: This figure is generated from the investment s portfolio by weighting the price of each bond by its relative size in the portfolio. This number reveals if the investment favors bonds selling at prices above or below face value (discount or premium securities, respectively). A higher number indicates a bias toward premiums. This statistic is expressed as a percentage of par (face) value. Credit Analysis: We reveal the quality of the bonds in a bond-heavy portfolio, from least risky to most risky, with the percentage assigned to each. If the portfolio holds a large percentage of assets in lower-quality issues, also called junk or high-yield bonds, then the investment follows a more aggressive style and is probably more concerned with yield than credit quality. International/Global options only Country Weightings: Since the returns of international portfolios are affected by the performance of the international markets in which they invest, Our international investment profiles tell which Five countries have the largest influence on a portfolio, along with the top Five securities in the portfolio. Morningstar Categories The following is a list and explanation of the Morningstar Categories: Conservative Allocation: These investment options invest in both stocks and bonds and maintain a relatively smaller position in stocks. These investment options typically have 20% 50% of assets in equities and 50% 80% of assets in fixed income and cash. Diversified Emerging Markets: An investment option that invests at least 50% of stocks invested in emerging markets. Diversified Pacific: An investment option that invests at least 65% of stocks in Pacific countries, with at least an additional 10% of stocks invested in Japan. Europe: An investment option that invests at least 75% of stocks in Europe. Foreign Large Value: These investment options seek capital appreciation by investing in large international stocks that are value-oriented. Large-cap foreign stocks have market capitalizations greater than $5 billion. Value is defined based on low price-to-book and price-to-cash flow ratios, relative to the MSCI EAFE index. These investment options typically will have less than 20% of assets invested in U.S. stocks. Foreign Large Blend: These investment options seek capital appreciation by investing in a variety of large international stocks. Large-cap foreign stocks have market capitalizations greater than $5 billion. The blend style is assigned to funds where neither growth nor value characteristics predominate. These investment options typically will have less than 20% of assets invested in U.S. stocks. Foreign Large Growth: These investment options seek capital appreciation by investing in large international stocks that are growth-oriented. 6 PQ2979 Fact Sheet User Guide

7 Large-cap foreign stocks have market capitalizations greater than $5 billion. Growth is defined based on high price-to-book and price-to-cash flow ratios, relative to the MSCI EAFE index. These investment options typically will have less than 20% of assets invested in U.S. stocks. Foreign Small/Mid Value: These investment options seek capital appreciation by investing in small- and midsized international stocks that are value-oriented. Small- and mid-cap stocks have market capitalizations less than $5 billion. Value is defined based on low priceto-book and price-to-cash flow ratios, relative to the MSCI EAFE index. These investment options typically will have less than 20% of assets invested in U.S. stocks. Foreign Small/Mid Growth: These investment options seek capital appreciation by investing in small- and mid-sized international stocks that are growth-oriented. Small- and mid-cap stocks have market capitalizations less than $5 billion. Growth is defined based on high price-to-book and price-to-cash flow ratios, relative to the MSCI EAFE index. These investment options typically will have less than 20% of assets invested in U.S. stocks. High-Yield Bond: An investment option with at least 65% or more of bond assets in bonds rated below BBB. International-Bond: An investment option with 80% or more of its assets invested in bonds and at least 40% of its bonds in foreign markets. Intermediate-Term Bond: An investment option that focuses on corporate and other investment-grade issues with an average duration of greater than or equal to 3.5 years but less than or equal to six years or an average effective maturity of more than four but less than ten years. Intermediate-Term Government: An investment option with at least 90% of its bond portfolio invested in government issues with a duration of greater than or equal to 3.5 years and less than six years or an average effective maturity of greater than or equal to four years and less than 10 years. Japan: An investment option that invests at least 75% of stocks in Japan. Latin America: An investment option that invests at least 75% of stocks in Latin America. Long-Term Bond: An investment option that focuses on corporate and other investment grade issues with an average duration of greater than six years or an average effective maturity greater than 10 years. Long-Term Government: An investment option with at least 90% of its bond portfolio invested in government issues with a duration of greater than six years or an average effective maturity of greater than or equal to 10 years. Moderate Allocation: These investment options invest in both stocks and bonds and maintain a relatively higher position in stocks. These investment options typically have 50% 70% of assets in equities and the remainder in fixed income and cash. Multisector Bond: Used for investment options that seek income by diversifying their assets among several fixedincome sectors, usually U.S. government obligations, foreign bonds, and high-yield domestic debt securities. Pacific ex. Japan: An investment option that invests at least 75% of stocks in Pacific countries, with less than 10% of stocks invested in Japan. Short-Term Bond: An investment option that focuses on corporate and other investment-grade issues with an average duration of more than one but less than 3.5 years or an average effective maturity of more than one but less than four years. Short-Term Government: An investment option with at least 90% of its bond portfolio invested in government issues with a duration of greater than or equal to one year and less than 3.5 years or an average effective maturity of greater than or equal to one year and less than four years. 7 PQ2979 Fact Sheet User Guide

8 Ultrashort Bond: Used for investment options with an average duration or an average effective maturity of less than one year. This category includes general corporate and government bond investment options, and excludes any international, convertible, multi-sector and high-yield bond investment options. World Allocation: Used for investment options with stock holdings of greater than 20% but less than 70% of the portfolio where 40% of the stocks and bonds are foreign. World Stock: An international investment option which has no more than 10% of stocks invested in the U.S. 8 PQ2979 Fact Sheet User Guide