The Morningstar Experience Part II: Does Your Portfolio Need an X-Ray?

In yesterday’s post, “Navigate Your Portfolio in Morningstar in 20 Minutes,” we introduced the highly respected advisory service and walked through how to enter your funds into its Portfolio Manager platform.  We put special emphasis on Morningstar’s hallmark 5-Star Ratings, enumerating some of the system’s strengths and weaknesses. You have access to the Stars without a subscription by simply searching for your fund, but other information on Portfolio Manager and the invaluable X-Ray tool we will navigate today does require one ($249 annually).

Let’s say Part I has already gotten you into Portfolio Manager. Go to X-Ray Overview and you’ll pull up a screen displaying a host of relevant data that are less overwhelming than they may seem to the math-phobes out there. At the upper left, you see the asset allocation of your fund holdings. You should be comfortable with your international weighting, which might well approach 40%. Of course, some folks might prefer little or even none at all, citing the prolonged underperformance versus U.S. stocks and our companies’ substantial participation in foreign businesses. You can also note the extent of your diversification through bonds.

Just below, your percentage allocation by sector is shown alongside the corresponding data for the S&P 500. Your degree of diversification is further indicated by three levels of your holdings’ sensitivity to changing economic climates.

Dipping below reveals fees and expenses examined in ways not routinely found on your brokerage statement. Note that the portfolio’s expense ratio is averaged across your funds. Next, you are put in touch with your estimated total fund expenses. Frankly, my own numbers were eye-openers and led to more cost control.

Moving now to the top center, we come to the much beloved and deceptively simple Morningstar Style Box. You are given the percentage of your stocks in three levels of size according to whether they are more value or growth-oriented, or fall somewhere in between.

Here’s a significant way this feature helped me uncover and solve a serious diversification problem. Despite my meaningful stake in the Vanguard Total Stock Index Fund, I was surprised to learn I was woefully underrepresented in small cap stocks. How could this be with a total market fund in my portfolio? I brought up the fund and checked its weighting across the three small style boxes. I was stunned–small stocks comprised only 8% of the “total market” fund. Clearly, I needed a small cap stock fund to get meaningful representation in the space.

Just to satisfy my curiosity, I pulled up Vanguard’s S&P 500 Index Fund. Suspicion confirmed–zero small stocks. Combined with a technology overweight over 30%, the S&P is less diversified than long-term index fund investors may realize.

Now go from Overview to Stock Intersection. Here Morningstar lays out the proportion of your portfolio by individual stock ranked according to position size. For example, I recently purchased a technology fund I believed would bring me up to snuff in meteoric Nvidia. I learned from the intersection tool I had achieved barely a 3% overall position, when the stock’s weighting in the S&P was twice as high. I was faced with a decision to hold or to accumulate.

A lot of info for a single tool! Is Morningstar worth the $249 hit? It is for me, but it has to make sense for you. Now well coached, you can surely pass the 20 minute test.