SM Morningstar Direct Regional Training Guide
Morning Session on Basic Overview The main objective of the morning session is become familiar with the basic navigation and functionality of Morningstar Direct. The exercise below will focus on how to build a list of investments, differentiate between Investment List and Search Criteria, how to populate and customize the list with specific data points, and how to communicate the results with charts and reports. This exercise will not cover custom portfolios, custom database, note manager, nor Excel API (see below). For additional training on the basics, refer to the Getting Started Checklist in the Training folder under Home or contact your dedicated client solutions consultant for one-on-one training or product support for general questions. For training on custom portfolios (i.e. model portfolios), custom database, note manager, and Excel API, refer also to the Training folder. Here, you will also find the remaining product areas covered in the afternoon session. 2012 Morningstar, Inc. All rights reserved. 1
Morning Session on Basic Overview 1. Go to Investment Lists and click on New. 2. You will be taken to the Select Investments dialog box. Go to Single Investments. 2012 Morningstar, Inc. All rights reserved. 2
Morning Session on Basic Overview 3. Using predictive text, start typing Fidelity Contrafund. You can also input the ticker. 4. Once you select Fidelity Contrafund, you will automatically be taken back to the grid view where the Fidelity Contrafund is now displayed. Click Add to continue to add more names to your list. 5. Select Multiple Investments and click OK. 2012 Morningstar, Inc. All rights reserved. 3
Morning Session on Basic Overview 6. You will be taken to the Find Investments dialog window. Proceed to add Russell 1000 Growth TR USD (Market Index) and US OE Large Growth (Morningstar Category). 7. Go to My Lists should you want to retrieve specific or all names from an existing list to add to your current list. Click OK, once complete. 2012 Morningstar, Inc. All rights reserved. 4
Morning Session on Basic Overview 8. You will be taken back to the grid view where you now have three items displayed. The numeric value is shown on the bottom left corner of your screen. Let s continue and click Add. 9. You will be taken back to the Select Investments window. Go to My Lists to retrieve all investments from an existing list to add to your current list. 2012 Morningstar, Inc. All rights reserved. 5
Morning Session on Basic Overview 10. Go to Import List and click OK. 11. You will be taken to the Import List window where you can import an excel or text file. You have a choice of various Identifiers as shown below. Close this view. 2012 Morningstar, Inc. All rights reserved. 6
Morning Session on Basic Overview 12. Go back to your Select Investments window and let s now discuss Search Criteria. Your default universe is based on your preferences but you can alter the universe to begin your search. Click OK, once complete. 13. You will be taken to the Advanced Search Criteria screen. Click here to start a new search. 2012 Morningstar, Inc. All rights reserved. 7
Morning Session on Basic Overview 14. Your default view is by Category but you can, at any point, change it to Alphabetically. Proceed to select Morningstar Category. 15. Retrieve the US Large Growth and US Large Blend universes. Select And in the operator column and run the search. You will notice that the items found are zero because a fund cannot be in two categories at one time. 2012 Morningstar, Inc. All rights reserved. 8
Morning Session on Basic Overview 16. Change the And statement into an Or statement. Run the search and you now have results for the number of items found. 17. Let s continue to add a few parameters. Add Oldest Share Class (under Snapshot) equals yes and Total Ret % Rank Cat YTD (Daily) is less than equal to 25 to capture those managers in the top 25 th percentile. Based on these parameters, we are retrieving all managers in the Large Growth category and only those managers that are the oldest share classes and those in the top 25 th percentile within the Large Blend category. 2012 Morningstar, Inc. All rights reserved. 9
Morning Session on Basic Overview 18. What if you want to apply the Oldest Share Class parameter and the Total Ret % Rank Cat YTD to the Large Growth category as well? We will then need to apply open and closed parenthesis. Input open parentheses in line 1 and closed parentheses in line 2 to apply these two parameters to Large Growth. 19. Run the search and you will see the number of Items Found change. 2012 Morningstar, Inc. All rights reserved. 10
Morning Session on Basic Overview 20. Keep in mind that if you click OK, then you will immediately add the results to your list of investments and you will not be able to go back to make modifications to your search. Those results added to your investment list will remain static. If you decide to save the search before adding the results to the list, then the search will be dynamic and stored in your Search Criteria folder. Before we add these results to our list, click Save As to save the search parameters to your Search Criteria folder where they will always remain dynamic. 21. You will be taken to the Save As window. Proceed to give your file a name. 2012 Morningstar, Inc. All rights reserved. 11
Morning Session on Basic Overview 22. Click OK again in the Advanced Search screen to add the names to your investment list. 23. In your investment list, you will now see the number of names increase. To save this file, click Save. 2012 Morningstar, Inc. All rights reserved. 12
Morning Session on Basic Overview 24. Input the name of the file. You can use the same name as what was used for Search Criteria since the files are located in two locations. Once complete, click OK. 25. You will see the file name displayed at the top. Let s proceed and now discuss the type of data points available. Click on the View drop down to access the Standard Data points. 2012 Morningstar, Inc. All rights reserved. 13
Morning Session on Basic Overview 26. Go to one of the columns and right click to access Custom Data Points as well - in addition to the Standard Data points. 27. Go to Edit Data. 2012 Morningstar, Inc. All rights reserved. 14
Morning Session on Basic Overview 28. You will automatically be taken to the Select Data Points window to access the Historical Data Points in addition to the Standard and Custom Calculation date points that we just discussed. In this location, you also have access to the custom database and performance attribution data points. 29. Lets add some data points and then we will save as our own Data Set. Go to Returns (Calendar Year) view and select Annual Ret 2011 twice and Annual Ret % Rank Cat 2011. Once complete, click OK. 2012 Morningstar, Inc. All rights reserved. 15
Morning Session on Basic Overview 30. You ll be taken back to the Grid View where the same two columns are displayed. Let s change the second column into a custom rank but first change the display name. Hover over the second Annual Return 2011 column, right click, and select Change Display Name. 31. Input the Display Name and click OK. 2012 Morningstar, Inc. All rights reserved. 16
Morning Session on Basic Overview 32. You will notice your display name appears in column heading. Next, right click again on the column heading and this time click on Raw Display Options and then select Percentile (Descending). 2012 Morningstar, Inc. All rights reserved. 17
Morning Session on Basic Overview 33. In this view, you will see the results of your custom ranks relative to the list you created vs. the ranks within their respective categories. Notice the differences. 34. Let s now save our Data Set. Click on Edit Data. 2012 Morningstar, Inc. All rights reserved. 18
Morning Session on Basic Overview 35. Proceed to make any more adjustments to your Data Set, click Save, and name your data set. 36. You will now see your saved Data Set at the top view. At any point, you can apply this data set to other applicable lists in addition to toggling between the other choices in the View Drop Down. 2012 Morningstar, Inc. All rights reserved. 19
Morning Session on Basic Overview 37. Go to Actions where you have more options to continue to do further analysis such as Reports, Charts, Holdings, Ownership, Performance Attribution and More. 38. Go to Charts and select Return Bar to activate the chart. 2012 Morningstar, Inc. All rights reserved. 20
Morning Session on Basic Overview 39. Make any view a modification from the drop downs and save your chart as a Clipboard, PowerPoint, PDF, or export into Excel. You can also display the Data Table. 40. Go back to your Grid View and click on the Actions drop down. 2012 Morningstar, Inc. All rights reserved. 21
Morning Session on Basic Overview 41. Should want to take specific investments and create a separate analysis, select Save As and you will activate various choices such as Model Portfolio, Investment List, Performance Report and more. For more information on Model Portfolios/Custom Benchmarks/Accounts, see Portfolio Management training resources in the Training folder. For more information on Performance Reporting, see the Training folder as well. 42. Lastly, go to Search Criteria to view the search you had saved earlier (step 21). Click on your Search (Sample Exercise) 2012 Morningstar, Inc. All rights reserved. 22
Morning Session on Basic Overview 43. Your grid view will display the results of your search. The numeric values are the results base on your parameters. Click on Search to make modifications in your Search (Investment List has an Add button instead). Note, this grid view is dynamic, because it s saved under Search, and will not update the list in your investment list which is static. In Search Criteria, you can utilize all the same functionality that we covered above from steps 25 to 40 in the Investment List folder. Therefore, the functionality to build a list is interchangeable in both the Investment List and Search Criteria folder we could have started from the Search Criteria folder, bring in a list based on parameters, saved the results as an Investment List, and then continue to add the other names (i.e. benchmarks and category averages). 2012 Morningstar, Inc. All rights reserved. 23
The main objective of the afternoon session is to focus on in-depth analytical tools to apply the various products within Morningstar Direct to identify specific results. Scenario I: Use Market Barometer to identify the top performers in US Market. Use Performance Reporting to search for the top managers YTD and to view their performance in the down markets since 2000. Use Scorecard to identify the top and bottom performers based on their custom scores for the percentile ranks across all time periods. Use Equity Attribution to decompose the impact of investment decisions of the top and bottom performer. Use Presentation Studio to graphically display the differences and communicate the results of the top and bottom performer. Use Real-Time Portfolio Analysis to monitor the top performer in real time. Use Asset Flows to identify the asset flow trends of the top and bottom managers as well as others from the initial list. Scenario II: Use Total Portfolio Attribution to decompose the impact of asset allocation decisions and manager selection. Use Asset Allocation Modeling to test the policy weights applied to the Total Portfolio Attribution allocation decisions. For more detailed product training - basics, tools/content, workflow, and methodology - refer to the Training folder under Home. You can also contact your dedicated client solutions consultant for one-on-one training or product support for general questions. 2012 Morningstar, Inc. All rights reserved. 24
Scenario I 1. Go to Home. Locate Market Barometer and click More. 2. You will be taken to the Market Barometer view. Identify the strongest US Market YTD. For our example, it is US Large Growth Market as of March 31, 2012. 2012 Morningstar, Inc. All rights reserved. 25
3. Next, go to Performance Reporting and click New. 4. You will be taken to the Select Investments window. Proceed to select Search Criteria. The default universe will be driven by your preferences (Open End Fund). Click OK. 2012 Morningstar, Inc. All rights reserved. 26
5. In the Search Criteria window, implement the following parameters to determine those US Large Growth managers that are in the top 25 percentile YTD, oldest share class, and that have performance going back to January 2000. At this time, 60 is the number of items found. Click OK, once complete. 6. You will be taken to the Group Setting window where you can select from various Morningstar and non Morningstar groupings including those from your Custom Database. Change the Peer Group from the default to Morningstar Category and Display Benchmark 1 to the Analyst Assigned benchmark. You can decide to do further modifications to Display Benchmark, Calculation Benchmark, or Risk-free Proxy. For more detail on these settings, refer to the Performance Reporting training resources in the Training folder under Home. Click OK, once complete. 2012 Morningstar, Inc. All rights reserved. 27
7. You will be taken to the Select Column window. Maintain User Defined to create our own time periods. Select OK. 8. You will be taken to the Performance Column Setup window to add custom calculation data points. Retrieve the following time periods: YTD Ending 3/31/2012, Mortgage Crisis (10/1/2007 to 3/31/2009), and Tech Bubble (9/1/2000 to 9/30/2002) 2012 Morningstar, Inc. All rights reserved. 28
9. Double click on one of the time periods should you want to change the Display name or deactivate the time periods in the column headings. 10. Go to the Data Points tab and add Alpha and Beta. Return will already be displayed as the default. Notice at the bottom of your view that Apply add/remove to all time periods is checked by default but you can uncheck if you want specific data points for certain time periods. 2012 Morningstar, Inc. All rights reserved. 29
11. Double click on Alpha to open the Data Settings window. Here, you can adjust the data series for the calculation. You will notice that monthly returns are the default but to calculate alpha and beta for YTD, you need more than three monthly series. Therefore, select Daily Return series and click OK. Do the same for Beta. This will ensure that the YTD Alpha and Beta will calculated based on Daily Return series. 12. Next, go to the Ranks tab and retrieve Peer Group Percentile. Click OK, once complete. 2012 Morningstar, Inc. All rights reserved. 30
13. You will be taken to the supplementary window where you can add historical and standard data points to your view. Remove the default calculation benchmark and replace it with Ticker. Should you choose to do so, you can add more standard or historical data points. Click OK, once complete. ` 14. You will be taken back to the Grid View. Click Calculate and you will asked to provide a Name to your report before you run it. Click OK to generate the report. 2012 Morningstar, Inc. All rights reserved. 31
15. Once your report calculates, the results will be displayed in your grid view. Our goal is to determine if the top 25 th percentile names performed well specifically during the down markets. To identify these specific results, we will use the scorecard. 16. Go to the Edit drop down and select Scorecard. 2012 Morningstar, Inc. All rights reserved. 32
17. You will be taken to the Investment Scorecard window. You have two choices of scores: Standardized Scoring or Custom Scoring. Select Custom Scoring. 18. Next, go to Advanced Settings where you can identify how you want to handle missing values. Reweighting is the default. Click OK, once complete. 2012 Morningstar, Inc. All rights reserved. 33
19. Let s begin to create our custom scores. Click Add Score. 20. You will be taken to the Custom Score Setting window. The default time period will automatically select All Time Periods but you can identify specific time periods. Go to the Data Point/Rank Selected drop down and select Return: Peer Group Percentile. Input the following values, scores, and displays between each quartile breakpoint. As shown on the first line, you can also input your own text ( Awesome! ). 2012 Morningstar, Inc. All rights reserved. 34
21. Once you ve completed your scores, you will be taken back to the Investment Scorecard view where you can designate specific weights to each time period. As you may recall, we identified the top 25 th percentile US Large Growth managers, YTD. Therefore, apply a lower weight to this time period of 10%. For the down market periods, let s give a higher weight to determine how these managers did in these down markets. We know they did well YTD but did they do well specifically in the down markets? Therefore, apply 45% to each of the down markets. Click OK, once complete. 22. You will be taken back to the grid view where your scores will be displayed. Proceed to click Calculate. 2012 Morningstar, Inc. All rights reserved. 35
23. Once the calculation is complete, the results of your scores will be displayed both in text and numeric format. 24. Go to the View drop down and click on Score Columns. 2012 Morningstar, Inc. All rights reserved. 36
25. Only those columns pertaining to the score results are displayed in your grid view. 26. Go to the Tools drop down, should you want to activate the Historical Scorecards for the same criteria that you applied to these three time periods. 2012 Morningstar, Inc. All rights reserved. 37
27. Next, right click on a manager to activate the additional display or analytical choices such as highlight, conditional formatting, holdings analysis, and more. 28. For example, based on the Total Score, select the top funds and highlight them in green. You can continue to highlight others (i.e. yellow). 2012 Morningstar, Inc. All rights reserved. 38
29. Once you have completed highlighting specific rows, go to the View drop down and select Highlighted Rows to activate only the highlighted results in your display. 30. Keep in mind that at any point, you can go to the Save drop down to save the specific names as an Investment List. 2012 Morningstar, Inc. All rights reserved. 39
31. For example, save the names from your performance report as a new investment list. Once complete, click OK. 32. Let s now identify the top and bottom managers, based on their overall scores. As seen in the image below, American Century Select Inv is the top manager while Turner Concentrated Gr Investor is the bottom manager. 33. Hover over the top manager (American Century Select Inv) and right click to activate your choices. Go to Performance Attribution and select Equity Single Attribution. 2012 Morningstar, Inc. All rights reserved. 40
34. Note that American Century Select Inv is automatically brought in as the portfolio. Go to Benchmark. Rather then selecting an index, we will use the bottom manager, Turner Concentrated Gr Investor, as the benchmark to understand why one manager did better than the other for a specific quarter during the down market. Under Report Settings, proceed to select New and then OK. 35. You will automatically be taken to the Settings window. Let s focus on a specific quarter in the down market 4Q, 2008. To view one single time period, select Single as the display frequency. Go to Grouping and remove the default, Morningstar Sector, and select GICS Sector. 2012 Morningstar, Inc. All rights reserved. 41
36. Go to Calculation Options to view your investment process choices: Top Down, Bottom Up, or Three Factor. Keep in mind, after you ve run your report, you can always exclude specific sectors/securities to see the impact on the results. 37. Additional information on the types of Calculation Options, including multi-period linking method and infer portfolio holdings, can be found in the methodology presentation located in the Training folder under the Home module. 2012 Morningstar, Inc. All rights reserved. 42
38. Proceed to go to View Settings where you can view how you want to view your results. We will spend more time on these choices as we view the results. Once your settings are complete, click Save as Template should you want to apply your settings to other reports. Next, click OK. 39. You will automatically be taken to Highlights to view your results. Go to the Active Return column. As you can see from the image below, the top performer s active return was 5.10% relative to the benchmark (bottom performing manager). 2012 Morningstar, Inc. All rights reserved. 43
40. Go to the Attribution tab to identify the sector with the strongest impact on the performance for this time period. For example, Consumer Discretionary had the strongest active return with most of the impact from Stock Selection McDonald Corporation. 41. Go to the Highest/Lowest tab to view the 10 highest weighted securities and 10 lowest weighted securities valuation data points. 10 Highest and 10 Lowest are the defaults. Keep in mind, you can modify any of the settings by clicking on Settings to be taken back to View Settings (step 38). Notice, McDonald s Corporation, biggest positive contributor to Consumer Discretionary, is in the 10 Highest. 2012 Morningstar, Inc. All rights reserved. 44
42. Go to the Portfolio Statistics tab to view the portfolio and benchmarks (bottom manager) valuation results for the beginning and ending portfolio dates. 43. Go to the Trailing Performance tab to view historical performance broken down by sector and by security As you can see, McDonald s Corp s performance was positive across all time periods. 2012 Morningstar, Inc. All rights reserved. 45
44. Go to Valuation by Data Point tab to view the beginning and ending valuation results by sector and then by security. The order of the display will be driven by the highest to lowest impact of the sectors. When we viewed the 10 highest and 10 Lowest securities, the valuation data points were as of the ending date. In the Valuation by Data Point tab, you will be able to view by sector and security for each frequency. In our case, we choice single earlier so the beginning and ending dates will be displayed. 45. Go to the Weights tab, to compare the beginning and ending weights by sector and security. As you can see, McDonald s Corporation was overweighted relative to the benchmark (bottom manager) which benefited the top manager since McDonald s performance was 1.66% over this time period (step 43). Keep in mind, you can toggle between all holdings or just the portfolio holdings. 2012 Morningstar, Inc. All rights reserved. 46
46. Go to the Attributions Holdings tab to access the holdings data for the portfolio and benchmark. As you can see, for this particular time period, the frequency is quarterly. Therefore, the in between months are Inferred. 47. Click on Summary PDF to activate its window. You can incorporate your logo in addition to identifying your views. Click OK, once complete. 2012 Morningstar, Inc. All rights reserved. 47
48. Your Summary PDF will contain many relevant pages. For example, below is a page pertaining to the Attribution Security Selection Effects to identify which securities added value and which did not add value. 49. To further compare and communicate the results, let s now turn our attention to Presentation Studio. Click Side by Side Comparison Morningstar Template under the Workbooks folder. 2012 Morningstar, Inc. All rights reserved. 48
50. You will be taken to the Investments: Settings window. Go to the Saved List drop down and locate the file you had created from Performance Reporting. The advantage of retrieving this file is also to have the ability to do further comparisons with other names from your list. The other option is to click on Add and add your names from scratch. 51. Once you retrieve your file, the first five investments will be checked. Make sure only the top performing and bottom performing managers are checked which need to be located at the top of the list. If you need to move the investment to a different order, simply click and drag the name to the top. Notice the benchmark displayed is driven by your preference and the Category average. Make sure both are checked and proceed to click OK. 2012 Morningstar, Inc. All rights reserved. 49
52. Your report will automatically generate. To zoom in on the top graphs closer, click the + sign at the bottom right corner or move the slider to the right. 53. Go to the 2008 column to compare the performance of the top and bottom performers. You will notice that American Century Select Inv s 2008 performance was better than it s category but also much better than the bottom manager. Interestingly, their results between the two managers are very close YTD. 2012 Morningstar, Inc. All rights reserved. 50
54. Click on one of the graphs and you will automatically activate the chart settings at the top for general changes and chart settings at the bottom for detailed modifications. You can also modify the chart by doing a right click. Therefore, you have three choices to make any changes to charts as well as tables: general settings at the top, general settings at the bottom, and right click settings. 55. Go to Home where you can save your workbook as a report and/or as a template to apply your settings to other investments. You can also send or share your report with your colleagues. Lastly, utilize the PDF, PPT, and XPS functions to save your report outside of Morningstar Direct. 2012 Morningstar, Inc. All rights reserved. 51
56. Before we continue and turn our attention next to Asset Flows, keep in mind, that you can view the top or bottom manager in real time. As mentioned in step 53, the YTD performance of the top and bottom managers is very close. Therefore, utilize Portfolio Analysis to view real time results. For example, click New. 57. Retrieve the top manager (American Century Select Inv) and click OK. 2012 Morningstar, Inc. All rights reserved. 52
58. Your portfolio analysis view will automatically populate. You have many views to choose from to customize your displays. For more information on this feature, refer to the Training folder. 59. Let s now turn our attention to Asset Flows to discover the impact of asset flows on these two funds during the down markets. Go to Asset Flows module and click on Custom Report. Go to Subset under row definitions, to retrieve American Century Select Inv and Turner Concentrated Gr Investor. Activate Time Series under Column Definitions to pull quarterly flows from 1/1/2000 to 3/31/2012. Once complete, click Generate Report. 2012 Morningstar, Inc. All rights reserved. 53
60. You ll automatically be taken to Excel to view the results. As you can see, these are mixed results and may not be tied to performance as we will demonstrate in the next step. 2012 Morningstar, Inc. All rights reserved. 54
61. To analyze these flows and returns ranked within their peer group, let s turn our attention back to Performance Reporting for a moment to view the asset flows during these time periods. As you can see, the Performance Group Percentile rank doesn t necessary correspond to the asset flow rank. Therefore, Asset Flows can be used to analyze funds during certain periods in addition to discovering and exporting data. 62. To further analyze the Asset Flows of other members of the list, go to Asset Flows and click Workspace. 2012 Morningstar, Inc. All rights reserved. 55
63. In the workspace view, go to the Inv.List tab under Saved Actions. Click on the investment list you saved from your performance reporting file. 64. You will automatically be taken to a new view displaying the asset flows for your list of investments. Within the Estimated Net Flow, you can sort by any column (i.e. YTD). Both American Century Select Inv and Turner Concentrated GR Investor YTD flows are listed. Keep in mind, you can always toggle to any grouping variable should you want to change the view. 2012 Morningstar, Inc. All rights reserved. 56
65. Go to the Sub-view drop down to access additional views. 66. Keep in mind, each time you create an Investment list, the file will be stored in the Workspace tab to view the asset flows. To broaden your list and view other markets, go to the Market Summary tab to access aggregated data (grouping variable) across various global markets. To drive the results, specify the Market Share Basis, Distribution Channel, and Active/Passive funds. 2012 Morningstar, Inc. All rights reserved. 57
67. As you click on any of the Grouping Variables (i.e. 5 star funds), you will be taken to a new view as we discovered earlier with our investment list. Here you can toggle back and forth between the groups to identify specific information for the 5 star funds. 2012 Morningstar, Inc. All rights reserved. 58
Scenario II 1. Let s now turn our attention to the second scenario to utilize Total Portfolio Attribution and Asset Allocation. Before we begin, however, you may want to create a model portfolio ahead of time in Portfolio Management. As you can see in the left image, the Model Portfolio has been created. The right image displays the managers that make up the model portfolio along with three asset mix dates. 2. Once you ve established your model portfolio, let s now turn our attention to Total Portfolio Attribution. Go to Total Portfolio Attribution in the Performance Attribution folder and click New. 2012 Morningstar, Inc. All rights reserved. 59
3. Retrieve your model portfolio. Keep in mind that you can edit the existing model portfolio or create a new model portfolio from this location. Go to Benchmark where we will Manually Enter Allocations. Go to Report Settings to create a New template. You also have access to the Morningstar Templates and or the settings from existing report. Click OK, once complete. 4. You will automatically be taken to the Asset Class Setup window where your managers of the model portfolio are listed. Here, you have the option as to how you want to group them. In this example, we are using the Broad Asset Class (US). 2012 Morningstar, Inc. All rights reserved. 60
5. Click Add to view additional asset class grouping choices including those that you may have created in Custom Database (My Database) located in Workspace. For demonstration purposes, we will maintain the Broad Asset Class (US) found under Country/Regional grouping. 6. Next, go to Benchmark Set Up where you ll find your asset classes and their default benchmarks. Click the magnifying glass should you want to change the asset class benchmark. 2012 Morningstar, Inc. All rights reserved. 61
7. Next, click on the manager drop-down should you want to alter their benchmark. The prospectus benchmark is the default. You can use the same asset class policy benchmark, your own custom benchmark, or select from the various other choices. Click Analyst Assigned. To use Analyst Assigned for all the managers, keep the top left box checked. 8. Let s now apply our weights. Collapse this view by clicking on 1. 2012 Morningstar, Inc. All rights reserved. 62
9. Input your policy weights and continue to fee assignment. 10. In the Manager Fee column, input the fees for those separate accounts listed. The default source fee for mutual funds is the Annual Report Net Expense Ratio but you have other choices from the Source of Fee drop down. Go to Portfolio Level Fees and add a fee (i.e. wrap fee or consultant fee). Once complete, continue to the Time Period section. 2012 Morningstar, Inc. All rights reserved. 63
11. In the time period view, the last quarter is the default. Notice you have the same time period options as seen in the other modules. Click the Last Quarter End time period. 12. You will be taken to the Time Period Settings window where you can change the defaults for the Time Period Display and Allocation Display. Notice the default allocation display is Ending Period Weights. Once you re satisfied with your settings, click OK and then proceed to View Settings. 2012 Morningstar, Inc. All rights reserved. 64
13. In the View Settings, make necessary changes as to how you want to view the output calculation option, column display, equity display, and decimal display. Once complete, you can save your Report and View Settings as a Template to apply to future model portfolios. Let s now generate the report. Click OK. 14. You ll be taken back to your grid view to view your results. As you can see from the Active Return column, the results were positive where most of the impact came from manager selection. Allocation was slightly positive while Manager Benchmark Misfit was slightly negative - for more detail on interpretation, view the TPA methodology presentation in the Training folder. Next, go to the Weight View. 2012 Morningstar, Inc. All rights reserved. 65
15. In this view, you can compare the policy weight to that of the actual weight. Notice that the taxable bonds asset class was underweighted by 10% vs. the policy weight. Luckily this underweight had a small impact on the overall active return (as seen in the previous image) whereas manager selection had a higher impact on the overall active return. Let s proceed and communicate the results further with the Summary PDF. Select Summary PDF. 16. You will be taken to its window to make any necessary cosmetic changes including adding a logo. Click OK, once complete. 2012 Morningstar, Inc. All rights reserved. 66
17. Similar to the Equity Attribution Summary PDF, the Total Attribution Summary PDF will produce various pages to communicate your results. Below are examples from two of the pages. 18. In addition to these PDF Summary Reports, you can automatically create custom reports in Presentation Studio. Go to Custom Reports to be taken to the Create New Report window. You can create a New Blank Report or select from the Morningstar or your own Templates. Select Morningstar Templates and then choose Total Portfolio Attribution Full Report. Click OK. 2012 Morningstar, Inc. All rights reserved. 67
19. Your report will generate in Presentation Studio and the results on each page will pertain to the Model Portfolio. If you want to drill down further at the manager level, take advantage of the additional categories in the menu drop down such as those charts and tables that pertain to Equity Attribution, Asset Flows, and more. 20. In the previous exercise, we ran a Total Portfolio Attribution report to determine where the value was added was it Asset Allocation and/or Stock Selection that added value? As we determined, most of the impact came from Manager Selection and less from Asset Allocation. Therefore, let s now take these policy weights and apply to the Asset Allocation module to generate potentially new target weights. As you recall from step 9, we applied these policy weights in Total Portfolio Attribution. 2012 Morningstar, Inc. All rights reserved. 68
21. Go to the Input folder in Asset Allocation and click on New Inputs. 22. You will be taken to the New Inputs window where you can select from three distribution models. For demonstration purposes, we will use Log Normal but refer to the Training folder for additional training resources on the other distribution models. Click on the +sign to add asset class assumptions. 2012 Morningstar, Inc. All rights reserved. 69
23. You will be taken to the Classification Master window where you can select your proxy index and create folders to organize your indexes by specific groupings (i.e. Large Cap, Intl EQ). Once you ve identified your asset classes, click Apply. 24. You will be taken back to the New Inputs window. If you don t need to alter the currencies, click OK. 2012 Morningstar, Inc. All rights reserved. 70
25. Three input windows will be displayed by default Estimates, Asset Class Statistics, and Correlations. Historical method is also the default but you can select Building Blocks, CAPM, Black Litterman, or input your own numeric values under User Defined. 26. Go to the Settings view at the top right. 2012 Morningstar, Inc. All rights reserved. 71
27. The default for the monthly return display frequency is Monthly. To view the estimates and Asset Class Statics in annualized terms, change the frequency to Annually. Click OK, once complete. 28. As you can see, your results are displayed in Annualized terms. 2012 Morningstar, Inc. All rights reserved. 72
29. Click on the Plus sign and let s view other Input windows that you can utilize. 30. For example, you can apply absolute or relative Constraints as well as Asset Class Distribution. Click and drag the Asset Class Distribution. 31. Go to Edit to activate the Settings window, click on the Bar Chart to activate the histogram bars. 2012 Morningstar, Inc. All rights reserved. 73
32. Let s now take our inputs and optimize them. Click on the plus sign again and this time, go to the Optimizer choices and retrieve Efficient Frontier, Composition, and Asset Mix Distribution. 33. You ll notice that the inputs are dynamically optimized to create an Efficient Frontier where you have up to 100 asset mixes to choose from. The Composition and the Asset Mix Distribution windows are blank since we have not created any portfolios yet. 2012 Morningstar, Inc. All rights reserved. 74
34. Let s first add the current policy mix that was used in Total Portfolio Attribution. Does the current policy mix fall on the Efficient Frontier? Go to Edit and click on Asset Mix to activate the Add Asset Mix window. Continue to name and add the weights of the current portfolio. You ll notice in this example, we ve broken out the US Equities into US Large Cap and US Small Cap. As long as the underlying breakdown equals the overall policy weights, you can be as detailed as you like. Click OK, once complete. 35. Notice your view will now populate the Current Portfolio across all windows. The Current Portfolio s expected return is 8.61 with a standard deviation of 9.80. Let s continue and create a new potential portfolio by identifying an optimal asset mix with the same risk as the current portfolio. 2012 Morningstar, Inc. All rights reserved. 75
36. Go to Edit and click Asset Mix to search for a new asset mix with the same standard deviation of 9.8% as the current policy mix we used in Total Portfolio Attribution. Name this potential portfolio as TP1 with same risk. Click OK, once complete. 37. Your first target portfolio (TP1 with same risk) will now be displayed on the efficient frontier. Continue to add two more target portfolios. These can be based on client guidelines or new objectives. As you add new target portfolios, they will populate across all your windows. The TP1 with same risk and the two target portfolio are circled in blue. 2012 Morningstar, Inc. All rights reserved. 76
38. Since we ve created our inputs, optimized our inputs, let s now forecast the performance. Keep in mind that all the windows are dynamic and instantaneously updated. Go to the same plus sign we used earlier and now activate the Forecasts charts and tables. Click the Wealth and Return Percentile Charts. Notice, you also have ability to apply in-flows and out-flows with the Cash Flow Setup. 39. As you activate the windows, the simulated results will populate your view. Go to the 5 year simulated forecast results. To interpret the results, we have a 5 percent probability to achieve the numeric values indicated for the current portfolio, TPI w/same risk port, conservative portfolio, and aggressive portfolio. Based on these results, we can decide perhaps to maintain the same current policy mix or recommend the Conservative Portfolio, TPI with same risk, or Aggressive portfolio. As seen in step 37 (pie charts), the current portfolio is diversified across various asset classes but it s not an optimal portfolio since it doesn t lie on the Efficient Frontier. Therefore, one of the three potential portfolios may be an alternative option to replace the current policy mix. 2012 Morningstar, Inc. All rights reserved. 77
40. At any point, go to Edit and activate the Settings window to alter the display, basic forecasting (i.e. initial wealth), inflation, and rebalancing. All settings in forecast charts and tables will activate the same setting choices. 41. Now that we have determined our new target portfolio, we can save our case and inputs. When you save your file as an input file, the default three input windows (step 25) will be activated as you open your file. When you save your file as a case file, your windows with their settings will be displayed. Before we save our Case file, let s bring in our favorite windows. Once complete, proceed to save the file. 2012 Morningstar, Inc. All rights reserved. 78
42. Click Save to activate its window. Let s save this file as a Case and Inputs file. 43. Once you save these files, it will be located in the Case and Inputs tabs. As a reminder, the case file will save your displays and the input file will save your inputs should you, for example, want to apply your Log Normal distribution to the Johnson distribution model. 2012 Morningstar, Inc. All rights reserved. 79