Morningstar Tools

The Morningstar Rating™ for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

The Morningstar style box is a descriptive way to visualize the general investment style of a mutual fund based on its portfolio holdings. It provides an easy-to-understand structure for comparing a fund against other funds within a peer group. While the style box provides insight into how diversified a portfolio of funds may be, it was not intended to be used as a tool for portfolio construction or to confine fund managers to one particular zone of the style box. For various reasons, funds may drift somewhat in their investment style in order to capture certain investment opportunities that arise in the markets or to reduce exposure to certain risks. American Funds’ policy is to select the holdings in its mutual funds with the sole purpose of accomplishing a fund’s stated objective rather than adhering to a specific Morningstar style box classification.

The Morningstar Ownership Zone takes the Morningstar equity style box one step further by plotting each stock held in a fund’s portfolio on the Morningstar style box grid. The shaded area represents 75% of the assets in the portfolio, providing a more complete picture of how a fund’s holdings are distributed across the equity style box. For example, funds that appear similar in size and style may actually contain different security types and may behave very differently from one another under a variety of market conditions. A large-cap fund may hold a number of mid-cap stocks while another large-cap fund may only hold blue chip stocks. The Ownership Zone can also be used to observe how consistent a fund’s style may be over time, although American Funds does not consider consistency of style to be a limiting factor in the way its funds invest. American Funds selects holdings in its mutual funds with the sole purpose of accomplishing a fund’s stated objective rather than adhering to a specific Morningstar style box classification.

Morningstar categorizes funds within one of nine broad categories: U.S. Stock, Sector Stock, Balanced, International Stock, Alternative, Commodities, Taxable Bond, Municipal Bond and Money Market. The broad category indexes listed with each category are used to show performance relative to a benchmark.

The Morningstar Category classifications break out fund portfolios into peer groups based on their holdings. The categories are used to gauge fund returns, potential risks and portfolio diversification. American Funds mutual funds may not always fit neatly into Morningstar categories. Our portfolio managers select holdings in our mutual funds with the sole purpose of accomplishing a fund’s stated objective rather than adhering to a specific Morningstar category classification. American Funds believes that managing to category classification can potentially reduce a fund manager’s investment flexibility and can in some cases lead a fund to experience an increase in volatility and decrease in returns.

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