CONTRIBUTORS
Amritha Kasturirangan, CFA
Portfolio Manager,
Research Analyst,
Franklin Equity Group
United States
Matt Quinlan
Portfolio Manager, Research Analyst
Franklin Equity Group
United States
Nyan Sheth, CFA
Portfolio Manager, Research Analyst
Key takeaways:
- In August 2024, Morningstar shifted its Style BoxTM methodology, resulting in many former “growth” stocks being reclassified as “blend” and “blend” stocks now designated as “value.”
- As a result, “core” holdings now skew toward higher beta,1 higher valuations and lower dividend yields, which could lead some investors with core equity exposure to underestimate portfolio risk.
- To recalibrate risk exposure to the previous core profile, investors may want to allocate more to strategies that focus on high-quality, resilient business models and a modestly lower beta profile.
Taking a closer look at core
As the largest market in the world, US equities often hold a prominent place in global indexes and investor portfolios. In fact, as of March 31, 2025, US equities made up over 50% of total net assets in the United States. Among US equity holdings, US large blend funds and exchange-traded funds (ETFs) accounted for more than half of all assets, totaling over US$8 trillion. This stands to reason, as investors aiming to tap into the US market often prefer broad exposure to core/blend, liquid, large-cap companies.
But here’s the twist: What if those “blend” assets aren’t as “core” as we thought? How might this shift an investor’s perception of portfolio risk? We believe Morningstar’s changes to its style calculations last summer merit further evaluation. Recent market volatility might make this a good time to reassess portfolio risk.
The Style BoxTM
Back in 1992, Morningstar introduced its iconic nine-grid Style Box, designed around two key axes: size and style (Exhibit 1). Morningstar assigns each company to a style box based on a proprietary algorithm. The placement of a fund or index within a style box is based on aggregating the weighted-average style scores of the underlying holdings.
Fast forward to today, and these boxes have become the go-to tool for categorizing funds into easily digestible categories. By pinpointing where a security lands within the Style Box, investors can make informed assumptions about risk and return factors, paving the way for a well-diversified portfolio.
Exhibit 1: Morningstar Style Box
What Does It Look Like?
Source: Morningstar. The Morningstar Style Box is a nine-square grid with three stock investment styles for each of three size categories: ‘small’, ‘mid’ and ‘large’. Two of the three style categories are ‘value’ and ‘growth’, while the third is ‘blend’ (funds that own a mixture of growth and value stocks). The darkened square details where a portfolio’s center of gravity is, in terms of its style and market cap characteristics.
Morningstar’s 2024 methodology change shifted many US large-cap stocks from growth to blend or value, potentially altering investors’ perceptions of their portfolio exposures. In today’s volatile market, we believe dividend growth strategies can offer a resilient core equity approach with potential downside protection and steady long-term performance.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal. The investment style may become out of favor, which may have a negative impact on performance. Large-capitalization companies may fall out of favor with investors based on market and economic conditions. Dividends may fluctuate and are not guaranteed, and a company may reduce or eliminate its dividend at any time.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
WF: 5524408