Download Creating and Working with Custom Asset Classes in Morningstar

C r e a t i n g a n d Wo r k i n g w i t h C u s t o m
Asset Classes in Morningstar Office
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Creating a Custom Asset Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Overview - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -2
How do I create a custom asset class? - - - - - - - - - - - - - - - - - - - - - - - -2
Applying a Custom Asset Class to a Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Overview - - - - - - - - - - - - - - - - - - - - - - - - - - - How to apply a custom asset class to a standard security - - - - How to apply a custom asset class to a user-defined security - - How to alter the asset class composition for a user-defined security
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Displaying Custom Asset Classes on Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Overview - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - How to create an asset allocation reporting set - - - - - - - - - - - - How to apply a custom asset allocation reporting set to a report - - - How to create a target asset allocation for the Current vs. Target Report
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Including Custom Asset Classes in Investment Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Overview - - - - - - - - - - - - - - - - - - - - - - - - - - - What is the Correlation Suitability Test? - - - - - - - - - - - - How to create a custom set of market assumptions - - - - - - How do I create a Target Asset Allocation for an investment plan? -
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C r e a t i n g a n d Wo r k i n g w i t h C u s t o m
Asset Classes in Morningstar Office
In Morningstar Office, users have the ability to create custom asset classes via the
Definition Master, similar to creating custom securities. Creating your own asset classes
has a number of benefits.
Overview
For instance, you can use custom asset classes to maintain consistency with the wording
you use throughout your practice. Whereas Morningstar might use “Large Core” as a label
on a report, you might prefer to use “Large Blend.”
You can also use custom asset classes to fill in gaps where the standard Morningstar asset
classes don’t provide coverage—such as for individual commodities, infrastructure or more.
This document covers how to do the following:
• create custom asset classes
• reclassify securities under custom asset classes
• use custom asset classes in reports, and
• include custom asset classes in investment plans.
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Creating a Custom Asset Class
Overview
Creating a Custom Asset Class
This section explains how to create a custom asset class in Morningstar Office. Once a
custom asset class is created, it is automatically available for custom reports and
market assumption sets (for use with investment plans).
Overview
To create a custom asset class in Morningstar Office, do the following:
How do I create a
custom asset class?
1. From the menu bar, select Tools…Edit Definition Master. The Definition Master
window appears.
2. From the left-hand navigation pane, select Asset Classes.
Click once on this option
Click once to
select this option
3. In the grid view, you will see a list of asset classes. If you have not yet created a custom
asset class, the list will contain only the 35 pre-defined asset classes that make up the
default Morningstar Asset Class Reporting Sets. To add a custom asset class to the list,
click the Asset Class Wizard icon on the toolbar at the top of the screen. The Asset
Class Wizard opens.
Click once on this option
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Creating a Custom Asset Class
How do I create a custom asset class?
4. Fill in the following fields with the appropriate information:
Field
Description
Asset Class Name
How the asset class will be listed in portfolio reports.
Description
This field is for your own reference. You can use the
Description field to type a more detailed definition of the
asset class, which will appear in the Definition Master but
not in reports.
Reporting Benchmark
This benchmark is used as a point of comparison when
you run the Portfolio Benchmark Comparison Report.
Planning Benchmark
The historical performance of this benchmark is used
within an investment plan as the basis for both the
projected return and standard deviation for the asset
class.
Broad Asset Class
Specify the broad asset class under which the asset class
falls. This information will be used in reports showing
asset allocation by broad (rather than specific) asset
classes, such as the Account Snapshot report.
Tax-Exempt Status
This information is used only in investment plans, and
does not affect standard reports. If the asset class is
exempt from one or more taxes, adjustments will be
made to both the projected taxable income and the
capital gains for securities of this asset class
Note the sample
information entered here
5. Click OK. The asset class has been added to the list. You can now apply this asset class
to securities, and include it in custom reports and market assumption sets.
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Applying a Custom Asset Class to a Security
Overview
Applying a Custom Asset Class to a Security
This section explains how to apply a custom asset class to a security—whether it is a
standard security available in Office, or one you created via the Definition Master.
Overview
You will also learn how to alter the detailed asset class composition for a user-defined
security.
While some information for a standard security tracked by Morningstar remains largely
static (name, ticker symbol, etc.), the asset class could change over time. Applying a
custom asset class to a security, then, allows you to control this variable. Doing so,
though, impacts a number of reports, Any security you reclassify will be listed under its
new, custom asset class on the following reports:
• Portfolio Benchmark Comparison
• Performance by Asset Class
• Performance History by Asset Class
• Portfolio by Asset Class, and
• Portfolio History by Asset Class.
) The Current vs. Target Asset Allocation and Current vs. Model reports will not display custom
asset classes, unless a custom Asset Allocation Reporting Set has also been created. See
page 10 for more information on creating a custom Asset Allocation Reporting Set.
To apply a custom asset class to a Morningstar-tracked security, do the following:
1. From the menu bar, select Tools…Edit Definition Master. The Definition Master
window appears.
2. From the left-hand navigation pane, select Reclassification. The Reclassification
screen lists any Morningstar-tracked securities with a custom asset class.
How to apply a
custom asset class
to a standard security
Click once to
select this option
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Applying a Custom Asset Class to a Security
How to apply a custom asset class to a standard security
3. From the toolbar at the top of the screen, click Add. The Add Security dialog box opens.
Click this icon to look up
securities you want to reclassify
4. In the Within drop-down menu at the top of the window, select the universe in which
the security is located.
5. Choose a search criterion (Name, Ticker, etc.), type a search term, and click Go.
6. The search results appear in the Available Records window. When you see the security
you want, click on the security name within the Available Records window, then click
Add. The security is moved to the Selected Records window.
This search looks for
any open-end fund
containing the word
“gold” in its name
7. You can run multiple searches before closing this window. To begin a new search, simply
repeat steps 4-6 until the Selected Records window contains every security you are
looking for, then click OK to close the Add Security dialog box.
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How to apply a custom asset class to a standard security
Applying a Custom Asset Class to a Security
8. The list of securities now appears in the Reclassification screen. Before changing a
security’s asset class, you must change its Classification Source from Morningstar to
User defined. Click the Classification Source cell and select User defined from the
drop-down menu.
Select this option
from the drop-down list
9. In the Classification column, click the magnifying glass icon. The Security
Reclassification dialog box appears.
Click here to select
the new asset class
You can assign the
full value to a single
asset class, or diversify
it among multiple asset classes
10. Click the Reporting Asset Class drop-down field, and select the asset class you want
to assign.
) Any custom asset classes you have created will be on this list. You can also choose from
among existing Morningstar asset classes. This determines how the security will be
categorized in reports.
11. In the Composition table, type numeric values to specify how the asset will be
categorized in portfolio asset allocation breakdown reports, as well as investment plans.
Custom asset classes will also be on this list.
) Most likely, you will assign a composition consisting of 100% of the custom asset class.
However, if the security is a fund with multiple underlying holdings, you might wish to enter a
breakdown of multiple asset classes.
12. Click Save + Close. The reclassification process is now complete.
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Applying a Custom Asset Class to a Security
How to apply a custom asset class to a user-defined security
User-defined securities are custom securities you create. You can import or manually
create any security not found in Morningstar’s research database. This usually includes
security types such as cash, fixed income, or derivatives. User-defined securities are
stored in the Securities area of the Definition Master.
How to apply a
custom asset class to a
user-defined security
To apply a custom asset class to a user-defined security, do the following:
1. From the menu bar, select Tools…Edit Definition Master. The Definition Master
window appears.
2. From the left-hand navigation pane, make sure Securities is selected.
3. Right-click on the security you wish to change and select Edit. The Security window
appears.
After right-clicking on
an item, select Edit from
the drop-down menu
4. Under the Attributes section on the Basic tab, click the Asset Class drop-down menu to
select a custom asset class.
Select a custom
asset class from the list
5. Click Save + Close to complete the update.
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How to alter the asset class composition for a user-defined security
Applying a Custom Asset Class to a Security
If a user-defined security is comprised of multiple underlying holdings, you might wish
to enter a specific asset class composition to better portray this detail. While the
security will still be broadly categorized under the asset class (e.g., Open-End Fund) you
assigned it to, Morningstar Office will integrate the more specific asset class
breakdown into reports showing portfolio asset allocation. The asset class composition
will also be used in investment plans, to predict security-level returns.
How to alter the asset
class composition for a
user-defined security
To add more asset-class detail to a user-defined security, do the following:
1. From the menu bar, select Tools…Edit Definition Master. The Definition Master
window appears.
2. From the left-hand navigation pane, make sure Securities is selected.
3. Right-click on the security you wish to change and select Edit. The Security Wizard
opens.
4. Click on the Detail tab at the top of the screen.
5. Under the Composition area, click Setup…. The Composition Setup dialog box appears.
Click this button to
change the composition
for a user-defined security
6. Assign a percentage to each asset class contained in the security. The percentages
must add up to 100.
Make sure the total
equals 100% exactly
7. When you are finished, click Save + Close to close the Composition Setup dialog box.
8. On the Security Wizard window, click Save + Close. The reclassification is complete.
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Displaying Custom Asset Classes on Reports
Overview
Displaying Custom Asset Classes on Reports
This section explains how to display securities with custom asset classes on certain
reports. You will learn the following:
Overview
• how to create an asset allocation reporting set
• how to apply a custom asset allocation reporting set to a report, and
• how to create a target asset allocation for the Current vs. Target Report.
When you reclassify a security using a custom asset class, the security will appear
under the custom asset class category in some reports, but not all. The following
reports automatically show the custom asset class of a reclassified security:
• Performance by Asset Class
• Performance History by Asset Class
• Portfolio Benchmark Comparison
• Portfolio by Asset Class, and
• Portfolio History by Asset Class.
To include a custom asset class on the Current vs. Model Portfolio or Current vs. Target
Asset Allocation reports, you need to create an asset allocation reporting set. (An
asset allocation reporting set is simply a list of asset classes used in comparing two
portfolios side-by-side, within the Current vs. Model Portfolio and Current vs. Target
Asset Allocation reports.)
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Displaying Custom Asset Classes on Reports
How to create an asset allocation reporting set
To create an asset allocation reporting set, do the following:
1. Under the Home tab (from the left-hand navigation pane), click Settings. The Settings
page appears.
2. Under the Portfolio Accounting System Settings area, click Asset Allocation
Reporting Sets. The Asset Allocation Reporting Set dialog box appears.
How to create
an asset allocation
reporting set
Select this option
3. In the bottom left-hand corner, click New. A new dialog box appears.
Click here to create a new
asset allocation reporting set
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How to create an asset allocation reporting set
4. Type a name for the asset class set.
5. Select one of the pre-defined reporting sets to use as a starting point for the new set.
Type a name for the
asset class set here
Select one of these
pre-defined options
6. Click OK. You are taken back to the Asset Allocation Reporting Set dialog box.
7. In the window in the middle of the screen is a list of asset classes. This list is based on
the pre-defined reporting set you selected earlier. To add a new asset class to this list,
click Add. The Add Asset Classes dialog box appears.
8. Note the Available Records box and the Selected Records box. Locate the asset class
you wish to add within Available Records. Click on that asset class to highlight it, then
click Add. The asset class now appears in the Selected Records area
) You can also change the order in which these asset classes are listed in Current vs. Model or
Current vs. Target Asset Allocation reports. To change location of an asset class within the
set, highlight the asset class in the list and use the up or down arrows to adjust its position.
9. When you have added every asset class you wish to include, click OK to close the Add
Asset Classes dialog box.
Once items are selected,
click Add to move them to
the Selected Records area
10. When you are satisfied with the composition of the asset allocation reporting set, click
Save + Close on the Asset Allocation Reporting Set dialog box.
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How to apply a custom asset allocation reporting set to a report
Displaying Custom Asset Classes on Reports
The set of asset classes you created can now be used in comparison reports. When
running either the Current vs. Model or the Current vs. Target Asset Allocation report,
you will encounter a Report Options dialog box. This dialog box includes an Asset
Allocation drop-down menu. Simply select a custom reporting set from the dropdown menu and click OK.
How to apply a custom
asset allocation
reporting set to a report
Select the name of
a custom asset allocation
set from this field
The report you create will display asset allocation breakdowns using the customized
asset class set.
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How to create a target asset allocation for the Current vs. Target Report
In order to run a Current vs. Target Asset Allocation report, you must first create a
target asset allocation in the Workspace module of Morningstar Office. The asset
allocation reporting set upon which the target asset allocation is based must match the
asset allocation reporting set upon which the report is based.
How to create a
target asset allocation
for the Current vs.
Target Report
Do the following from the Workspace module:
1. In the left-hand navigation pane, select the Asset Allocations option.
2. From the toolbar at the top of the window, click New. The Asset Allocation Profile
dialog box appears.
3. In the Model Name field, type a name for the Asset Allocation.
4. In the Based on field, click the magnifying glass icon. The Change Market Assumptions
dialog box appears.
5. From the Within field, select Asset Class Set.
6. Click Go to see all asset class sets.
Be sure Asset Class Set
is selected in this field
Select an Asset Allocation
set, then click OK
7. From the list of available asset class sets that appears, select an asset allocation
reporting set you created.
8. Click OK to close the Change Market Assumptions dialog box.
9. After returning to the Asset Allocation Profile dialog box, assign allocations by
percentage to each asset class on the list.
10. When you are finished, click OK. The process is complete. Now that you have created an
asset allocation set based on the custom asset class reporting set, you can include that
asset allocation set in Current vs. Target Asset Allocation reports.
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Overview
Including Custom Asset Classes in Investment Plans
Including Custom Asset Classes in Investment Plans
This section explains how to create a custom set of market assumptions (to
incorporate custom asset classes), and how to include those custom asset classes in
investment plans you create from Morningstar Office. Prior to creating an investment
plan with a set of custom market assumptions, it will be subject to a correlation
suitability test.
Overview
When you create a set of market assumptions, Morningstar Office calculates the
performance correlation of all asset classes to one another based on the historical
return of each asset class. (The resulting correlation matrix can be viewed by clicking
on the Correlations tab of the New/Edit Market Assumptions window.)
What is the Correlation
Suitability Test?
Be sure to select the
Correlations tab in this
window to see this information
Each time an asset class is added to a set of market assumptions, the correlation
suitability test is performed for the overall matrix. In order for both the Monte Carlo
simulation and auto-allocation features for an investment plan to function properly, the
correlation matrix must pass the test. Namely, the market assumptions set cannot
include a large number of asset classes too strongly correlated to another and
performing similarly in all economic scenarios.
If the market assumption set does not pass the suitability test, you will be notified in a
warning message. If this is the case, you can still create an investment plan, but the
results might not be reliable.
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How to create a custom set of market assumptions
You can create a custom set of market assumptions on which to base investment
plans. To create a custom set of market assumptions, do the following from the
Workspace module:
How to create
a custom set of
market assumptions
1. From the left-hand navigation pane, select Market Assumptions.
Select this option from
the Workspace module
2. From the toolbar at the top of the screen, click New. The New Capital Market
Assumptions dialog box appears.
Click this icon to create
a new set of market assumptions
3. Select one of the pre-defined reporting sets to use as a starting point for the new set.
4. Click OK to close the dialog box. The New/Edit Market Assumptions window appears.
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How to create a custom set of market assumptions
Including Custom Asset Classes in Investment Plans
5. In the Name field at the top of the screen, type a name for the market assumptions set.
6. The list of asset classes included in the set can be edited. To remove an asset class from
the list, check the box next to the asset class and click Delete.
Type a name for the set of
market assumptions here
7. To add an asset class to the list, click Add. The Add Asset Class dialog box appears.
8. In the Asset Class Name field, click the magnifying glass icon. The Select Asset Class
dialog box appears.
9. Click Go to see all available records, including any custom asset classes you created.
10. Select the name of the asset class you wish to add and click OK. You are returned to the
Add Asset Class dialog box.
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How to create a custom set of market assumptions
11. The Proxy Index field populates automatically with the index associated with the
selected asset class. You can change the proxy index by clicking on the magnifying
glass icon in that field and selecting a different index from Morningstar’s database. The
Expected Return and Standard Deviation fields automatically populate with data derived
from the historical performance of the proxy index, but can be manually edited as well.
These fields populate automatically,
based on the information entered
when the custom asset class was created.
You can change the information if you want to.
12. Click OK to close the Add Asset Class dialog box.
13. Once you are satisfied with the list of asset classes included in the set of market
assumptions, you can manually edit the following fields within the Expected Returns
Table:
• Expected Return
• Standard Deviation
• Yield, and
• Total Turnover values.
14. Click OK to save the new set of market assumptions.
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Including Custom Asset Classes in Investment Plans
How do I create a Target Asset Allocation for an investment plan?
When you create an investment plan for a client, you can include a custom Asset
Allocation set. That Asset Allocation set will be seen on the efficient frontier graph, and
you can choose to select that allocation as the client’s target investment portfolio. You
can include a custom asset allocation set in an investment plan, though, only if it is
based on the same set of market assumptions used in the plan.
How do I create a
Target Asset Allocation
for an investment plan?
To create an asset allocation set using a custom set of market assumptions, do the
following from the Workspace module:
1. In the left-hand navigation pane, select the Asset Allocations option.
2. From the toolbar at the top of the window, click New. The Asset Allocation Profile
dialog box appears.
3. In the Model Name field, type a name for the Asset Allocation.
4. In the Based on field, click the magnifying glass icon. The Change Market Assumptions
dialog box appears.
) Make sure the Within field reads Market Assumptions.
5. Click Go to see all market assumption sets.
6. From the list of available market assumptions sets that appears, select the custom set
you have created and click OK.
Select the name of the
custom Market Assumptions set
you want to use as the basis for the
Asset Allocation lineup, then click OK
7. After returning to the Asset Allocation Profile dialog box, assign allocations by
percentage to each asset class in the list.
8. When you are finished, click OK. The asset allocation set is now ready to be used in any
investment plan that is also based on the custom market assumptions.
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