The sector classification system includes U.S. open-end mutual funds, ETFs, variable annuity subaccounts, separate accounts, collective investment trusts and insurance group separate accounts. The new system provides a detailed view of a fund’s strategy and investments. It also addresses the needs of global investors by including sectors for world and emerging market bond funds.
“As many investors found out the hard way in 2008, two bond funds may be in the same category, but have very different holdings and risk exposure,” said John Rekenthaler, vice president of research for Morningstar. “Morningstar’s new classification system helps investors to better understand a fixed income fund’s investments and more accurately compare it with other funds in the same category.”
The new classification methodology is based on a three-tier system starting with six Super Sectors, including Government, Municipal, Corporate, Securitized, Cash & Equivalents and Derivatives. Below the Super Sectors are 17 Primary Sectors, which then break down into 72 Secondary Sectors. Morningstar applies its sector classification system to all fixed-income funds globally, as well as funds with significant bond exposure such as allocation funds. Under the old two-tiered system, fixed-income securities and derivatives in a fund’s portfolio were mapped into one of 13 Sectors, which rolled up into four Super Sectors.
The new sector assignments are available in Morningstar’s web-based products, and the company expects to roll them out in all of its products in the coming months. The Morningstar Global Fixed Income Sector Classification methodology is available at http://corporate.morningstar.com/FIClassification.