Constructon Rules for Mornngstar Canada Momentum Index SM Mornngstar Methodology Paper January 2012 2012 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or n part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted.
Contents Index Characterstcs Overvew Incepton Dates and Base Values Calculaton and Dssemnaton Tradng Holdays Index Value Currences Scheduled Reconsttuton Dates Scheduled Rebalancng Dates Index Commttee Assgnng Stocks to the Index Overvew Investable Unverse Index Elgblty Index Selecton Index Calculatons Basc Formula Constructed Shares and Consttuent Weghtng Dvsor Adjustments 4 4 4 4 4 6 6 7 8 Corporate Acton Adjustments 9 Data Correcton and Precson 11 Appendx A: Mornngstar Varable Descrptons 12 n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 2
Index Characterstcs Overvew The Mornngstar Canada Momentum Index s comprsed of lqud equty securtes of Canadan companes screened for above average returns on assets and equty, wth an emphass on upward earnngs estmate revsons and techncal prce momentum ndcators. Incepton Dates and Base Market Values The ncepton date of the Index s December 1, 199. Daly prce and total return seres are avalable from ths date forward. The ndex base market value at ncepton s 1,000. Calculaton and Dssemnaton of Index Values Prce return ndex values are dssemnated electroncally at 15-second ntervals durng regular tradng hours, and dssemnated over the Börse Stuttgart tape. Daly and monthly prce and total return ndex values are dstrbuted va varous data dstrbuton channels and are avalable on http://ndexes.mornngstar.com. Tradng Holdays The Mornngstar Canada Momentum Index s not calculated when the Toronto Stock Exchange s closed. Index Value Currences The closng values the Mornngstar Canada Momentum Index are calculated n Canadan Dollars, and U.S. Dollars usng an average of the Reuters bd and ask prce. Scheduled Reconsttuton Dates The Index s reconsttuted.e., the Index membershp s reset four tmes annually. Adjustments are made at the close of trade on the thrd Frday of March, June, September, and December. The changes become effectve on the next busness day. Scheduled Rebalancng Dates The weghtng of each Securty are adjusted four tmes annually. Adjustments are made on the Monday followng the thrd Frday of March, June, September, and December. If the Monday s not a busness day, then rebalance occurs on the next busness day. Index Commttee The ndex commttee conssts of Mornngstar s Index Groups followng leaders: Head of Busness Unt, Head of Operatons, head of Product Development n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted.
Assgnng Stocks to the Mornngstar Canada Momentum Index Overvew At each reconsttuton date, the nvestable unverse and ndex elgblty are defned based on the crtera descrbed n ths secton. The nvestable unverse and ndex elgblty crtera are appled n the sequence n whch they appear below. Each crteron s appled only to the survvors of the crtera appled prevously. Investable Unverse To qualfy for ncluson n the nvestable unverse, a securty must meet the followng crtera: 1) The Consttuent Securtes must trade on the TSX 2) Issuers must be classfed as a Canadan ssuer based on country of ncorporaton, prmary stock market actvtes and headquarters and prmary busness actvtes ) It must be common shares or unts of ncome trusts 4) Issuers must meet screens for above average returns on assets and equty, wth an emphass on upward earnngs estmate revsons and techncal prce momentum ndcators Index Elgblty To be ncluded n the Index, a securty n the nvestable unverse must satsfy the followng condtons: Average monthly volume (12 month) must be n the top thrd of the nvestable unverse Index Selecton At each reconsttuton, securtes n the nvestable unverse are assgned a Weghted Average Fundamental Factor Rank (WAFFR) based on ther weghted average rank of the followng fve fundamental factors (see appendx A for fundamental factor defntons): Fundamental Factor Strategy Weght Tralng Return on Equty 20.00% - Month EPS Estmate Revson (Current Year) 0.00% Latest Quarterly Earnngs Surprse 10.00% n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 4
Prce Change from Month-End Months Ago 10.00% Prce Change from Month-End 9 Months Ago Percent Change n Prce from 12 Month Hgh 10.00% 20.00% The WAFFR for each securty s determned on each rebalance date by Mornngstar as follows. For each fundamental factor relatve rankngs for all stocks are calculated where Securtes wth the best possble value wll be gven a score of 100 whle the Securtes that have the worst possble value wll be gven a score of 0. Ths score out of 100 s multpled by the assgned strategy weght and repeated for each varable that has been assgned a weght. A total score s then tabulated for all Securtes. The Securtes wth the hghest score wll be ranked 1 whle the stock wth the lowest total score receves the worst rank. Once the Securtes are scored by ther respected fundamental factors securtes meetng the Index elgblty are selected to the Index n the followng manner: Rank order of securty by ther WAFFR Current ndex consttuent meetng all the followng crtera s retaned n the ndex: o Ranks n the top 40% by ther WAFFR Addtonal securtes are added to the ndex n order of WAFFR untl the Index conssts of 0 consttuents provded that they have meet all of the followng condtons: o Rank amongst the top 0% by WAFFR o Do not exceed a cap of 5 Securtes per GICS sector n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 5
Index Calculatons Basc Formula The value (prce) and total return of an ndex s calculated usng Laspeyres formula. n (p (t)*s (t)) =1 Index(t)= *BaseIndexValue=(M(t)/B(t))*BaseIndexValue n C(t) (p (0)*s (0) j=1 j j The above formulas can be smplfed as: M(t) Index(t) = D(t) Where: D(t) = dvsor at tme (t)=b(t)/base Index Value n = number of securtes n the ndex p (0) = closng prce of securtes at the base date s (0) = constructed securtes of company at the base p (t) = prce of securtes at tme (t) s (t) = constructed securtes of company at tme (t) C(t) = adjustment factor for the base date market captalzaton t = tme the ndex s calculated M(t) = market captalzaton of the ndex at tme (t) B(t) = adjusted base date market captalzaton of the ndex at tme (t) It s mportant to note that the shares (s (t)) for the ndex consttuents are artfcal constructs used for calculaton purposes. Consequently, the constructed shares only have relaton to the actual shares of the company n terms of the current market prce/far value relatonshp. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 6
Index Calculatons (Cont.) Constructed Shares and Consttuent Weghtng The Index s rebalanced on a quarterly bass. The data used to determne new ndex weghts s as of the last busness day of the month pror to the effectve date of the rebalancng. The Index s an equal weght ndex. An Index consttuents weghtng n the Index s determned by: 1 IW(q)= n And the constructed shares (s (t)) for each consttuent n the ndex calculaton formula are determned as follows: s(t)= n j=1 (s (t-1)p (t-1)*iw(q) j j p (t-1) Where: n = number of securtes n the ndex (q) = quarter end tme the ndex weghts are calculated (t) = tme the ndex s calculated p (t) = prce of securtes at tme (t) IW (q) = company weght n ndex at quarterly rebalancng tme q fp(q) = Mornngstar Far Value Prce of company at tme (t) ts(q) = Total outstandng shares of company at tme (q) s (t-1) = constructed shares of company at tme t mnus 1 * f (q) = free float factor of company at tme (q) * At tme of ndex ncepton the constructed shares are determned by an arbtrary portfolo value, $10 Bllon. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 7
Index Calculatons (Cont.) Dvsor Adjustments To avod dstortons caused by corporate actons that affect the share captal of Index consttuents, the dvsor of the Index s adjusted accordngly. The followng formulae wll be used for dvsor adjustments due to corporate acton. D(t+1)=D(t)* n =1 n =1 [ Δ ] (p (t)*s (t))+ MV(t+1) (p (t)*s (t)) Note: If the current tradng prce of an ssue s unavalable, the prevous tradng sesson s closng prce s used. However, f the ssue s affected by any corporate acton that requres an adjustment, then the adjusted prce s used. Where: D(t) = dvsor at tme (t) D(t+1) = dvsor at tme (t+1) p (t) = stock prce of company at tme (t) s (t) = number of shares of company at tme (t) Δ MV(t+1) = aggregate change n market value resultng from corporate actons Most but not all of the followng actons wll requre the calculaton of an adjustment factor whch wll be ncluded n the after-market-close ndex calculaton on the prevous busness day descrbed above n the secton ttled Basc Formula. Generally, because the ndex s not market cap weghted changes to the share captal structure of ndex consttuents wll not affect the component weghts. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 8
Corporate Acton Adjustments Spn-Offs Issues spun off by ndex holdngs (parent company) are not added to the ndex but wll be consdered for ncluson at the next reconsttuton. The weght of the parent company s reduced by a factor of the spn-off converson rato, that s the weght s a product of the orgnal shares and the new prce. A dvsor adjustment s made to account for the reducton n market value. Mergers and Acqustons If an Index consttuent acqures or merges wth another ssuer of a Securty n the ndex, the orgnal Securtes are replaced by the Securty of the successor entty. The weght of the new Securty s equal to the market value sum of the orgnal ndex consttuents. If an Index consttuent acqures or merges wth ssuer of a Securty that s currently not a component of the ndex, then the orgnal Securty s replaced by the securty of the successor entty. The weght of the new Securty s equal to the market value of the orgnal ndex consttuent. A dvsor adjustment s not necessary because the ndex market value remans unchanged. If an Index consttuent s acqured or merged by an entty that s not an ndex component, the orgnal ndex consttuent s removed from the ndex. A dvsor adjustment s made to reflect the decrease n market value. Stock Dvdends / Splts Stock splts and dvdends do not requre a dvsor adjustment because the market value of the entty remans unchanged. Share Repurchase / Offerng If an ndex consttuent ssues or repurchases shares, the new share captal structure s consdered at the next rebalancng date. Delstng, Bankruptcy, and Fnancal Dstress If an ndex consttuent s delsted by ts prncpal exchange (such as the TSX), enters bankruptcy proceedngs, or s under extreme fnancal dstress by the Index Commttee, the Securty s removed from the ndex. Exceptons are made on a case-by-case bass. For example, a securty mght not be removed mmedately when a bankruptcy flng s not a result of operatng or fnancal dffcultes. Upon deleton, a dvsor adjustment s made to reflect the decrease n market value. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 9
Change of Prncpal Exchange A securty s removed from the ndex f ts prncpal exchange ceases to be the TSX exchange. A dvsor adjustment s made to reflect the decrease n market value. Change of Domcle If a company ceases to meet the company domcle elgblty rule, the company s removed from the ndex. The domcle of the company must be Canada. A dvsor adjustment s made to reflect the decrease n market value. Loss of Lqudty If a consttuent accumulates 10 consecutve non-tradng days between reconsttuton dates, t s removed from the ndexes. Two busness days pror notce of ts removal s provded. A dvsor adjustment s made to reflect the decrease n market value. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 10
Data Correctons and Precson Index-Related Data and Dvsor Correctons Incorrect prcng and corporate acton data for ndvdual ssues n the database wll be corrected upon detecton. In addton, an ncorrect dvsor of the Index, f dscovered wthn fve days of ts occurrence, wll always be fxed retroactvely on the day t s dscovered to prevent an error from beng carred forward. Commercally reasonable efforts are made to correct an older error subject to ts sgnfcance and feasblty. Correctons are lmted to 2 hours after close. Computatonal and Reportng Precson All calculated and adjusted data are stored n real numbers. For reportng purposes, Index values are rounded to two decmal places and dvsors are rounded to approprate decmal places. Undocumented Events Any matter arsng from undocumented events wll be resolved at the dscreton of the Mornngstar Index Commttee. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 11
Appendx A: Mornngstar Varable Descrptons Average Daly Tradng Volume The average daly tradng volume s a measure of the lqudty of an ssuer s securty. It s calculated by takng a securty s daly tradng volume for the past quarter and calculatng the arthmetc average. Tralng Return on Equty Tralng Return on Equty s the rato of a company's tralng 4 quarters of operatng EPS as a percentage of the company's average shareholders' equty per share over the past 4 quarters. Return on equty measures a company's proftablty by revealng how much proft a company generates wth the money shareholders have nvested. -Month EPS Estmate Revson -month EPS estmate revson measures the percentage change over the past months n the medan broker earnngs estmate for a company's current fscal year. For example, an estmate revson of 15% means that current year earnngs estmates have been rased by 15% over the past months. Hgh values are consdered best for rankng purposes. Latest Quarterly Earnngs Surprse Quarterly Earnngs Surprse s a propretary measure that calculates the percentage dfference between the actual and expected earnngs for the latest reported quarter. ESRP s adjusted n two ways: 1) a decay factor s used to reduce the surprse as tme passes; and 2) earnngs varablty s factored nto the calculaton to ensure that f two companes beat the consensus estmate by the same percentage, the company wth the lower earnngs varablty wll have the hgher earnngs surprse. Hgh values are best. Prce Change from Month-End - (9-) Months Ago Prce change from Month-End - (9-) months ago takes the current prce of the stock and compares t wth the prce of the stock (9-) month ends ago. Hgh values are best. Percentage Change n Prce from 12 Month Hgh Percentage prce change from 12 month hgh. n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 12