Morningstar Issues New Equity Classifications

According to the investment research firm, it has developed a new industry sector system to help the investment community better judge various stock issues and to address the limits of conventional sector analysis.

Morningstar’s new sector structure starts by dividing the stock universe of approximately 6,300 US equities and 21,100 global equities into 128 industries ranging from semiconductors to medical equipment.

These industries are classified into 40 industry groups, which are then used to construct 12 separate sectors. Finally, each of these 12 sectors is assigned to one of three Super Sector classifications – the Information Economy, the Service Economy, and the Manufacturing Economy – that, in turn, contain four sectors

Morningstar said the new classification system:

• redefines some individual sectors to more closely reflect the changing structure of the global economy,
• creates a system that defines each sector based upon the business in which companies are engaged instead of traditional methods which included expected behavior, such as consumer cyclicals,
• recognizes that cyclicality is present in many different industries within multiple sectors, and
• breaks the catch-all technology sector into three separate sectors software, hardware, and telecommunications. These sectors, along with media, now represent the Information Super Sector.

The company’s sector structure changes are part of a series of enhancements being made to Morningstar’s research methodology, the company said.

Morningstar introduced a new investment Style Box methodology in May, and is scheduled to launch the new Morningstar Rating for mutual funds June 30. The new sector classification structure will be introduced in the third quarter of 2002, and all of Morningstar’s products will incorporate the new system by year-end.