Equity Factor Indexes for the
Canadian Market
Paul Kaplan, Ph.D., CFA
Director of Research, Morningstar Canada
Morningstar Research Paper
June 2012
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
Equity Factor Indexes for the Canadian Market | June 2012
In the 1960s, several academics independently formulated what came to be known as the Capital
Asset Pricing Model, or the CAPM for short.1 According to the CAPM, the expected excess return of
every security is proportional to its systematic risk (beta) with respect to the market portfolio. Furthermore, every investor should hold nothing other than a combination of the market portfolio and
cash (long or short), the blend between the two reflecting individual risk tolerance. This later predication of the CAPM is the intellectual origin of broad market index investing.
However, research in the late 1970s and early 1980s showed that over the long run beta is not the
only factor relevant to predict performance. Over long periods of time, small-cap stocks and those
with relatively favorable valuation ratios tend to outperform market beta portfolios. (These two
phenomena are often called the size effect and value effect, respectively.) As academics began to
accept these empirical rejections of the CAPM, two schools of thought emerged to explain them.2
1. The efficient market school, which views the size and value effects as systematic risk factors
(or proxies thereof) in addition to the market portfolio which the markets rationally awards risk
premiums for taking.
2. The inefficient market school which believes that market prices differ from fair values but that as
the differences tend toward zero over time, value and size premiums will occur without any connection to risk factors.
Factor Indexes
In the U.S., the existence of the size and value effects led to the practice of dividing the market
into groups of stocks on the basis of market capitalization and valuation ratios. Morningstar began
to popularize the concept in the 1990s with its Equity Style Box. The Equity Style Box is a 3×3
grid that on the vertical axis shows whether Morningstar classifies a stock or equity fund as being
Large-cap, Mid-cap, or Small-cap with respect to size as measured by market capitalization, and
whether it falls in the Value, Core (or Blend), or Growth area as measured by Morningstar’s proprietary multi-factor style model. (See Figure 1.) 3
SM
Figure 1: The Morningstar Equity Style BoxSM
Value
Core
Growth
Large
Mid
Small
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
2
Equity Factor Indexes for the Canadian Market | June 2012
In the early 2000s, Morningstar expanded on the Style Box for equity funds with the Equity Ownership Zone. In Ownership Zone analysis, the Style Box is treated as a piece of graph paper and
each stock in a portfolio is plotted on it. The asset-weighted average position is called the Centroid and is plotted as well. The Ownership Zone itself is an ellipse that contains the stocks that
make up 75% of the portfolio closest to the Centroid as measured by asset value. Plotting the
Ownership Zones of different portfolios on the same chart provides a visual representation of how
similar or different the investment styles of the portfolios are. See Figure 2 for an example using
Morningstar’s US Equity Style Indexes discussed below.4
SM
Figure 2: Morningstar US Style Indexes Ownership Zones—April 30, 2012
Deep Value
Core Value
Core
Core-Growth
High Growth
Giant
Large
Mid
Small
Micro
Source: Morningstar Direct
Also in the early 2000s, Morningstar introduced its first family of indexes, the Morningstar US
Style Indexes. Nine of these indexes are a set of mutually exclusive and exhaustive portfolios that
contain all of the stocks in the U.S. Market index according to the nine squares of the Style Box.
Embodied as Exchange-Traded Funds (ETFs), these indexes provide a powerful tool for U.S. investors to obtain style-pure exposure to the U.S. equity market.5
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
3
Equity Factor Indexes for the Canadian Market | June 2012
Factor indexes are only useful as they represent distinct market behaviors, which are manifested
as distinct patterns of return over time. To see if the size and value factors as represented by
the Morningstar US Styles indexes meet this criterion, we plot the following two index ratios in
Figure 3 over the period July 1997 through April 2012:
1. Small/Large. This is the ratio of the Morningstar US Small-Cap index to the Large-Cap index.
Each of these indexes is comprised of all of the stocks that are its size band. Any period for which
this line is upward sloping is when small-cap stocks were outperforming large-cap stocks and any
period for which it is downward sloping is when large-cap stocks outperformed small-cap stocks.
Since the ratio of 1.54 at the end of the overall period is well over 1.00, we conclude that the size
premium was clearly realized over this period.
2. Value/Growth. This is the ratio of the Morningstar US Value index to Growth index. Each of these
indexes is comprised of all of the stocks that are its column of the Style Box. Any period for which
this line is upward sloping is when value stocks were outperforming growth stocks and any period
for which it is downward sloping is when growth stocks outperformed value stocks. Since the ratio
of 1.49 at the end of the overall period is well over 1.00, we conclude that the value premium was
clearly realized over this period.
Figure 3: Size and Value Effects Morningstar US Style Index Ratios
2.5
2.0
Small/
Large
1.5
Value/
Growth
1.0
0.5
0
1998
1999
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2012
Data from July 1997–April 2012.
Data from
July
1997–April
Source: Morningstar
Direct,
Morningstar
Indexes2012
Source: Morningstar Direct, Morningstar Indexes
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
4
Equity Factor Indexes for the Canadian Market | June 2012
Figure 4 shows the historical compound annual returns and standard deviations of all of the
Morningstar US Style indexes over the period July 1997 through April 2012. What stands out from
this chart is not only the realized size and value premiums over the period, but also the additional
risk of the Growth indexes in comparison to their Value and Core counterparts.6
Figure 4: Risk and Return of Morningstar US Style Indexes
10
Small Value
9
Medium Value
8
Compound Annual Return (%)
5
4
Medium Core
Mid-Cap
7
6
Small Core
Core
Large Core
Small-Cap
Value
Medium Growth
All
Large Value
Large-Cap
Small Growth
3
Growth
2
Large Growth
1
0
14
16
18
20
22
24
Annualized Standard Deviation (%)
26
28
30
Data from July 1997–April 2012.
Source: Morningstar
Indexes
Data fromDirect,
July Morningstar
1997–April
2012
Source: Morningstar Direct, Morningstar Indexes
Factor Tilts Indexes for Canada
After developing the Ownership Zone for U.S. equity portfolios, Morningstar developed Ownership
Zone analysis for other equity markets, including Canada. When applied to portfolios that are composed exclusively of Canadian stocks, the Ownership Zone chart shows where each stock and each
portfolio falls in terms of market capitalization and value/growth orientation relative to the Canadian equity market. In other words, stocks that fall in the large-cap band are large relative to other
Canadian stocks but not necessarily relative to stocks in other markets such as the U.S. Figure 5
shows the Ownership Zones for the Canadian equity indexes discussed below.
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
5
Equity Factor Indexes for the Canadian Market | June 2012
Figure 5: Morningstar Canadian Style Indexes Ownership Zones—April 30, 2012
Deep Value
Core Value
Core
Core-Growth
High Growth
Giant
Large
Mid
Small
Micro
Source: Morningstar Direct
Morningstar took a different approach to introducing equity factor indexes for the Canadian market than it did in the U.S. First, rather than starting with the Style Box, we took a broader view of
equity factors based on academic findings that suggest that there are equity factors beyond size
and value/growth orientation. As Figure 6 shows, more recent research has identified Momentum7
and Liquidity 8 as distinct factors in addition to Value and Size. Furthermore, dividend yield is often
treated as a factor, which we regard as a special type of value orientation. The practical manifestation of this has been the creation of several dividend indexes and ETFs in the U.S.9
Secondly, we leveraged the expertise of Toronto-based Computerized Portfolio Management Services (CPMS), a leading expert on factor-based equity investing in the Canadian and U.S. markets,
which Morningstar acquired in 2009. CPMS provides a broad range of portfolio analysis and equity
return enhancement products to the Canadian investment community, and has a reputation of
delivering high-quality data on over 4,000 companies in North America. Clients include institutional
money managers, pension plans, institutional brokerage departments, financial planners, and
investment advisors.
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
6
Equity Factor Indexes for the Canadian Market | June 2012
Figure 6: Explaining Long Run Stock Returns Through Factors
Momentum
Liquidity
Current
Emerging
Market
1960s–1970s
Value
1980s–1990s
Size
1970s–1980s
Morningstar created three equity indexes for the Canadian market based on the following CPMS
factor-based strategies.
1. The Canadian Value Strategy. This strategy is suited for investors seeking value for money
through stocks with low price/reported earnings, price/book, and cash flow ratios. The strategy emphasizes stocks with low P/E multiples based on reported earnings, low price/cash flow multiples
based on reported cash flow, and low price/book ratios. Importance is also placed on stocks with
high earnings estimate revisions. The Morningstar® Canada Value IndexSM is based on this strategy
and utilizes the methodology inherent in the CPMS model portfolios. Figure 7
provides details on this index.
2. The Canadian Earnings Momentum Strategy. This strategy is suited for aggressive, shortterm, active investors. The strategy emphasizes stocks with high earnings estimate revisions and
quarterly earnings momentum. Importance is also placed on stocks with positive earnings surprise
and positive price change. The Morningstar® Canada Momentum IndexSM is based on this strategy
and utilizes the methodology inherent in the CPMS model portfolios. Figure 8 provides details on
this index.
3. The Canadian Dividend Growth Strategy. This strategy is suited for income-oriented investors
seeking to buy profitable companies that are growing their dividends. The strategy emphasizes
stocks with high expected dividend yields and dividend growth. Importance is also placed on stocks
with high cash flow momentum and return on equity. The Morningstar® Canada Dividend Target
30 IndexSM is based on this strategy and also utilizes the methodology inherent in the CPMS model
portfolios. Figure 9 provides details on this index.
In each strategy, stocks are screened to ensure they have minimum liquidity and analyst coverage
as well as earnings in the upcoming year. Stocks are also screened to be included in the top
250 stocks within the extensive CPMS Equity Universe. Each of the three Morningstar indexes is an
equally weighted portfolio of the top 30 stocks based on the weighted average of the selection factors as shown in Figures 7, 8, and 9, respectively.
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
7
Equity Factor Indexes for the Canadian Market | June 2012
Figure 7: Morningstar Canada Value Index
Index Characteristics
3 Designed to provide diversified exposure to stock with relatively low prices given anticipated
per-share earnings, book value, cash flow, sales, and earnings estimates.
3 Rebalances and Reconstitutions take place on a quarterly basis.
3 Securities are equal weighted at each reconstitution.
Eligible Universe
3 Trades on the TSX.
3 Classified as a Canadian issuer based on country of
incorporation, primary stock market activities
and headquarters, and primary business activities.
3 Meets screens for:
3 Low Price/Earnings Ratios
3 Low Price/Cash Flow Ratios
3 Low Price/Book Value Ratios
3 Low Price/Sales Ratios
Eligible Universe
3 Price to Earnings Ratio (trailing): 20.00%
3 Price to Latest Cash Flow: 20.00%
3 Current Price/Book Ratio: 20.00%
3 Price to Latest Four-Quarter Sales: 20.00 %
3 Estimate Revision (Current Year) 3 Months: 20.00%
Figure 8: Morningstar Canada Momentum Index
Index Characteristics
3 Designed to provide diversified exposure to Canadian issuers which have demonstrated,
among other things, positive momentum in earnings and price.
3 Rebalances and Reconstitutions take place on a quarterly basis.
3 Equally weighted based on specific selection factors.
Eligible Universe
3 Trades on the TSX.
3 Classified as a Canadian issuer based on country
of incorporation, primary stock market activities
and headquarters, and primary business activities.
3 Meets screens for:
3 Above-average ROE and ROA.
3 Emphasis on upward earnings estimate revisions
Eligible Universe
3 Trailing Return on Equity: 20.00%
3 3-Month EPS Estimate Revision (Current Year): 30.00%
3 Latest Quarterly Earnings Surprise: 10.00%
3 Price Change from Month-End Three Months Ago: 10.00%
3 Price Change from Month-End Nine Months Ago: 10.00%
3 Percent Change in Price from 12-Month High: 20.00%
and technical price momentum indicators.
Figure 9: Morningstar Canada Dividend Target 30 Index
Index Characteristics
3 Reflects the performance of 30 high-quality dividend-paying Canada-based equities. 3 Rebalances and Reconstitutions take place on a quarterly basis.
3 Securities are equally weighted at each reconstitution.
Eligible Universe
3 Listed on TSX.
3 One of the 100 stocks with the highest
12-month average trading volume.
3 Dividend Yield greater than 1%.
3 Securities of Canadian-domiciled firms who have
Common Shares or Units of Income Trusts.
Eligible Universe
3 Expected Dividend Yield: 33.33%
3 Cash Flow to Debt: 20.00%
3 Five-Year Normal EPS Growth: 13.33%
3 Return on Equity: 20.00%
3 3-Month EPS Estimate Revision: 13.33%
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
8
Equity Factor Indexes for the Canadian Market | June 2012
As the Morningstar indexes are fairly specialized strategies, where might they fit into an overall
portfolio of Canadian stocks? To help answer that question, Figure 5 shows the Ownership Zones
for the three Morningstar indexes along with that of the S&P/TSX 60 index, which is the most
popular Canadian equity index in terms of the assets of Canadian investors linked to it in the form
of index funds and ETFs. (This is not surprising as the S&P/TSX 60 consists of the largest 60 stocks
of the comprehensive S&P/TSX Composite Index, represents 73% of the assets of the Composite
index, has monthly returns that are 99.4% correlated with it, and as Figure 13 shows, has almost
identical performance and risk.10)
Figure 5 shows that the Morningstar indexes offer some style diversification with respect to the
TSX 60. The Dividend index, while still large-cap, has stocks with less market-cap than the TSX 60.
Not surprisingly, it has more of a value orientation. The Value and Momentum indexes each have
a mid-cap focus, which can provide diversification across the size spectrum within a portfolio. Also,
as we would expect, the Value index has a clear value bias and the Momentum strategy has a
clear growth bias.
This is not to say that these various indexes hold completely distinct portfolios. Given the limited
number of stocks that trade on the TSX, it is not surprising that some of the same names appear
in portfolios that are constructed using different principles. As Figure 10 shows, there is a certain
amount of stock overlap among the three Morningstar indexes and the TSX 60. However, note how
different the exposure to the commonly held stocks is among the portfolios.
Figure 10: Canadian Equity Indexes Stock Overlap—April 30, 2012
Royal Bank of Canada
Bank of Nova Scotia
Suncor Energy Inc
Bank of Montreal
Canadian National Railway Co
BCE Inc
Canadian Imperial Bank of Commerce
TELUS Corp
Rogers Communications, Inc. Class B
National Bank of Canada
Thomson Reuters Corporation
Canadian Oil Sands Ltd
Magna International Inc. Class A
Power Corporation Of Canada
Shoppers Drug Mart
Tim Hortons, Inc.
Shaw Communications, Inc. Class B
Fortis, Inc.
Bombardier Inc
Saputo, Inc.
ARC Resources Ltd.
Metro Inc. A
Canadian Tire Corp
TransAlta Corporation
Enerplus Corp
Loblaw Companies Limited
George Weston Limited
TSX 60
Morningstar Dividend
Morningstar Value
Morningstar Momentum
0
1
2
3
4
5
% of Portfolio
6
7
8
Morningstar
Direct, Morningstar
Indexes
Source:Source:
Morningstar
Direct, Morningstar
Indexes
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
9
Equity Factor Indexes for the Canadian Market | June 2012
In addition to opportunities for style diversification as shown in Figure 5, the Morningstar indexes
also provide opportunities for diversification across economic sectors. As Figure 11 shows, the
Canadian equity market is heavily weighted in Financial Services, Energy, and Basic Materials. But
what Figure 11 also shows is how much lighter the Morningstar Value and Momentum indexes
are exposed to these sectors, and how much more exposure all of the Morningstar indexes have to
the remaining sectors. Hence, Canadian investors can use the Morningstar indexes to tilt
away from Financial Services, Energy, and Basic Materials and form more diversified portfolios
within the Canadian stock market.
Figure 11: Canadian Equity Indexes Economic Sector Overlap—April 30, 2012
Healthcare
Technology
Utilities
TSX 60
Morningstar Dividend
Morningstar Value
Morningstar Momentum
Consumer Cyclical
Consumer Defensive
Real Estate
Communication Services
Industrials
Basic Materials
Energy
Financial Services
0
5
10
15
20
% of Portfolio
25
30
35
Data from January 2002–April 2012.
Source: Morningstar Direct, Morningstar Indexes
Data from January 2002–April 2012
Source: Morningstar Direct, Morningstar Indexes
Of course investors are ultimately concerned with performance and risk. As Figures 12 and 13
show, all of the Morningstar factor indexes have significantly outperformed the TSX 60 over
the period January 2002–April 2012. This is consistent with the idea that each factor index will
ultimately deliver the premium that each is designed to capture. Furthermore, as Figure 13
shows, by combining these indexes among themselves and with the TSX 60 (or TSX Composite),
these premiums could have been realized while reducing the risk of an overall portfolio. The curve
in this figure is the historically efficient frontier of compound rate of return versus standard deviation of the period. Due to the high, realized factor premiums over this period, most of the portfolios
along the curve consist only of the factor indexes. Only those points on the extreme left end
of the efficient frontier contain the TSX 60, the largest exposure being 8.76% for the minimum
variance portfolio.
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
10
Equity Factor Indexes for the Canadian Market | June 2012
Figure 12: Canadian Equity Index Performance
C$ 10.00
C$ 4
C$ 3
C$ 2
C$ 1.00
TSX 60
Morningstar Dividend
Morningstar Value
Morningstar Momentum
C$ 0.10
2002
2003
2004
2005
Data from January 2002–April 2012.
Source: Morningstar
Direct, January
Morningstar2002–April
Indexes
Data from
2006
2007
2008
2009
2010
2011
2012
2012
Source: Morningstar Direct, Morningstar Indexes
Figure 13: Risk and Return of Canadian Equity Indexes and Index Portfolios
18
16
Morningstar All
14
Compound Annual Return (%)
Morningstar Canada
Value Index
12
Morningstar Canada
Dividend Target 30 Index
10
Morningstar Canada
Momentum Index
61/13/13/13
70/10/10/10
8
6
TSX Comp
TSX 60
4
2
0
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0
Annualized Standard Deviation (%)
Data from January 2002–April 2012.
Data from
January
2002–April
Source: Morningstar
Direct,
Morningstar
Indexes
2012
Source: Morningstar Direct, Morningstar Indexes
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
11
Equity Factor Indexes for the Canadian Market | June 2012
The point labeled “Morningstar All” in Figure 13 represents the equally weighted portfolio of the
three Morningstar factor indexes (i.e., one third in each). This portfolio falls almost exactly on
the efficient frontier. However, since no investor is likely to hold such a portfolio, we also show that
combining it with the TSX 60 would have both reduced risk and enhanced performance. We show
two such portfolios: the 70/10/10/10 portfolio, which is 70% in the TSX 60 and 10% in each of the
three factor indexes and the 61/13/13/13 portfolio which is 61% in the TSX 60 and 13% in each
of the three factor indexes. As the figure shows, the greater the use of the factor indexes, the closer is the overall portfolio to the efficient frontier. Assuming that this relationship continues to
hold in the future, this demonstrates the possible risk-reducing and performance-enhancing potential of these factor indexes for a Canadian equity investor.
Conclusion
Extensive academic research has shown that there clearly exist distinct factors which explain returns on U.S. stocks. Because exposure to these factors, especially size and value, has been shown
to generate premiums for investors that tilt their portfolios toward them over the long run,
equity factor indexes and ETFs that embody them have become quite popular among U.S. investors.
Research conducted by Morningstar shows that similar factors operate in the Canadian market
with similar potential benefits for Canadian equity investors. Based on this research, Morningstar
has created a dividend, value, and momentum index to capture each of these three factors,
respectively. We have shown that these indexes can indeed provide several benefits to investors.
In particular, investors can use them to gain diversification across the Style Box (i.e., across
both the dimensions of size and value/growth orientation) and across economic sectors. Furthermore, when combined with the popular TSX 60, these indexes can simultaneously reduce the
overall risk of a Canadian equity portfolio and enhance performance, thus bringing investors to an
overall better place in the risk/return space.
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
12
Equity Factor Indexes for the Canadian Market | June 2012
1. For a history of the development of the CAPM, see Bernstein, Peter L., 1992. Capital Ideas: The Remarkable Origins of Modern
Wall Street, New York: Free Press.
2. For a more detailed discussion, see Kaplan, Paul D., 2011. “Investing at Full Tilt,” Morningstar Indexes 2011/12 Yearbook,
Morningstar, Inc.
3. For more on the Style Box and its uses, see Kaplan, Paul D. and Don Phillips, 2010. “The Morningstar Approach to Mutual Fund
Analysis–Part II,” Mutual Funds, John A. Haslem, ed., John Wiley & Sons.
4. For further discussion of the Morningstar Ownership ZoneSM and its uses, see Kaplan, Paul D. 2012. “Holdings-Based and
Returns-Based Style Models,” Frontiers of Modern Asset Allocation, Paul D. Kaplan, ed. John Wiley & Sons and Kaplan. Paul
D., James A. Knowles, and Don Phillips.“ 2003. More Depth and Breadth than the Style Box: The Morningstar Lens,” Handbook
of Equity Style Management, Third Edition, T. Daniel Coggin and Frank J. Fabozzi, eds., John Wiley & Sons.
5. BlackRock iShares offers ETFs based on these nine Morningstar US Style indexes.
6. For a more detailed performance analysis of the Morningstar Style indexes and how they differ from the factor indexes of other
providers, see Kaplan, Paul D., Don Phillips, and Travis Pascavis. 2012. “Purity of Purpose: How Style-Pure Indexes Provide Useful Insights,” Frontiers of Modern Asset Allocation, Paul D. Kaplan, ed. John Wiley & Sons.
7. The academic literature on the momentum effect begins with Jegadesh, Narasimham and Sheridan Titman. 1993. “Returns to
Buying Winners and Selling Losers: Implications for Stock Market Efficiency,“ Journal of Finance 48:65-91.
8. For a discussion of the liquidity effect, see Ibbotson, Roger G. and Zhiwu Chen. 2012. “Liquidity Investing,” Ibbotson Stocks,
Bonds, Bill, and Inflation (SBBI) Classic Yearbook, Morningstar, Inc.
9. For descriptions of Morningstar’s US dividend indexes, see Arya, Sanjay and Paul D. Kaplan. 2012. “Yield to Investors? A Practical Approach to Building Dividend Indexes,” Frontiers of Modern Asset Allocation, Paul D. Kaplan, ed. John Wiley & Sons and
Gries, Matthew, Warren Miller, and Josh Peters. 2012. “A Quality Dividend Solution,” Morningstar Indexes 2011/12 Yearbook,
Morningstar, Inc.
10. These results are based on portfolio holdings data on the two indexes dated April 30, 2012 and monthly total return data over
the period January 2002–April 2012 obtained from Morningstar Direct.
©2012 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. “Morningstar,”
and the Morningstar logo are registered marks of Morningstar, Inc.
13