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Direct

A Multi-Level Exploration of Funds with the Fixed Income Exposure Analysis Tool

Exercise Guide

Morningstar Direct June 2020© 2020 Morningstar. All Rights Reserved.

Copyright © 2020 Morningstar, Inc. All rights reserved.

The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; (3) is not warranted to be accurate, complete or timely; and (4) does not constitute advice of any kind. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Any statements that are nonfactual in nature constitute opinions only, are subject to change without notice, and may not be consistent across Morningstar. Past performance is no guarantee of future results.

Morningstar Direct June 2020 3© 2020 Morningstar. All Rights Reserved.

Contents

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Preparing to Work with the Fixed Income Exposure Analysis Tool. . . . . . . . . . . . . . . . . . . . . . . 5

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Exercise 1: Read the background material for this data . . . . . . . . . . . . . . . . . . . . . . . . . . 5Exercise 2: Screen for Fixed-Income Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Exercise 3: Create a data set for the funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Identifying the Number of High-Quality Holdings for a Bond Fund . . . . . . . . . . . . . . . . . . . . . 13

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Exercise 4: Change the component settings to show the Count . . . . . . . . . . . . . . . . . . . 13Exercise 5: Review a fund’s holdings for negative weights. . . . . . . . . . . . . . . . . . . . . . . 16

Finding Countries with Concentrated Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Exercise 6: Change the attributes for a fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Exercise 7: Review a fund’s potential performance with the Scenario Analysis tool . . . 20


A Multi-Level Exploration of Funds with the Fixed Income Exposure Analysis Tool

OverviewThe Grid in the web-based version of Morningstar DirectSM allows users investigating fixed-income funds to see a curated collection of calculated data points such as credit rating, effective duration, modified duration, and more. Most of these calculated fixed income data points offer both an average value, and a breakdown of data by portfolio weight. Seeing these data points juxtaposed, however, does not aid in a deeper analysis and true understanding of a manager’s strategy for the portfolio, as well as what true risks lay in wait for investors and how their returns may be impacted.

For example, two funds may seem to have similar weightings to various credit rating classifications and effective duration breakdowns, but the actual breakout of this data among the holdings in the funds could be wildly different. The new Fixed Income Exposure Analysis (Fixed Income Exposure Analysis) tool allows users to see how a variety different fixed-income attributes intersect with one another. Thus, the tool offers users much more detailed information to understand how risk exposures may be amplified or balanced in a fund’s portfolio. This information provides a more precise analysis into the underlying contributors of risk and return, allowing meaningful differentiation between managed investment alternatives.

This manual offers the following exercises for working with the Fixed Income Exposure Analysis tool:

g Exercise 1: Read the background material for this data (page 5)g Exercise 2: Screen for Fixed-Income Funds (page 6)g Exercise 3: Create a data set for the funds (page 9)g Exercise 4: Change the component settings to show the Count (page 13)g Exercise 5: Review a fund’s holdings for negative weights (page 16)g Exercise 6: Change the attributes for a fund (page 17)g Exercise 7: Review a fund’s potential performance with the Scenario Analysis tool

(page 20)

Preparing to Work with the Fixed Income Exposure Analysis Tool Overview


Preparing to Work with the Fixed Income Exposure Analysis Tool

OverviewPrior to working with the Fixed Income Exposure Analysis tool, it will help to know how the data presented in the table is calculated, how to understand various attributes that can be used, and find answers to common questions about it. Users will also want access to a set of fixed-income funds which can be analyzed in the tool. This section offers the following exercises in support of these actions:

g Exercise 1: Read the background material for this data on page 5g Exercise 2: Screen for Fixed-Income Funds on page 6, andg Exercise 3: Create a data set for the funds on page 9.

Exercise 1: Read the background material for this data

Before using the Fixed Income Exposure Analysis tool, it will help to be familiar with both the methodology that underpins how the data is calculated, and some frequently asked questions about how the data is presented. Use the following links to read each document:

g Fixed Income Exposure Analysis Methodology Paperg Frequently Asked Questions about the Fixed Income Exposure Analysis Tool

Note: These documents can also be found in the Fixed Income Exposure Analysis tool itself, by clicking the links available from the Information icon on the component header.

Callout

Preparing to Work with the Fixed Income Exposure Analysis Tool Exercise 2: Screen for Fixed-Income Funds


Exercise 2: Screen for Fixed-Income Funds

Using the Fixed Income Exposure Analysis tool requires a selection of fixed-income funds. If you already have a list or screen with these investments, feel free to use one of those for the following exercises. Otherwise, follow these steps to have a set of funds with which to practice:

1. From the header click Create > Screen. The Screener window opens.

2. For the Investment Type, select Exchange-Traded Fund and Open-End Fund, then click OK. Note that a criterion for Domicile is automatically added.

3. In the Search for data points field, type peer, then select Morningstar Category.



4. Select the following categories, then click OK:

Note: It will be easier to find and select these by first choosing Fixed Income under the Global Broad Category Group.

g Corporate Bondg Emerging Markets Bondg High Yield Bondg High Yield Munig Multisector Bondg Muni National Longg Nontraditional Bond, andg World Bond.

5. In the Search for data points field, type rating, then select Morningstar Analyst Rating > Overall.

6. Select the values for Gold, Silver, and Bronze, then click OK.

7. In the Search for data points field, type oldest, then select Oldest Share Class.



8. The option for Yes is selected by default. Click the toggle for Allow Missing Values, then click OK.

9. In the Search for data points field, type exchange, then select Exchange Country.

10. In the Filter field, type united, then select United States and click OK.

11. Click Done.

Preparing to Work with the Fixed Income Exposure Analysis Tool Exercise 3: Create a data set for the funds


12. From the Screen Actions menu, select Save.

13. Name the screen Analyst-Rated Bond Funds, then click Save.

Exercise 3: Create a data set for the funds

Prior to working with the Fixed Income Exposure Analysis tool, two last actions should be completed in the Grid to help with this work. First, a custom data set of calculated fixed-income data will be created. Second, the Grouping function in the Peer Analytics panel will be enabled, to help users find different types of funds more quickly in the exercises that follow. Do the following:

1. From the Data Set menu, select Create New Data Set. The Data Set Management window opens.



2. Use the following table to know what search terms to enter and data points to select:

3. Click Done.

Enter this search term… To select these data points…

Ticker Ticker

Credit Rating Credit Rating Breakdown (Calculated) > Add All (9)

Effective Effective Duration (Calculated)

Effective Maturity (Calculated)

Modified Modified Duration (Calculated)

Yield Yield to Maturity (Calculated)



4. From the Data Set menu, select Save.

5. Name the data set Calculated Fixed-Income Data, then click Save.

6. Click Show Peer Analytics.



7. Click the toggle for Grouping, then click Apply.

Note: The default Grouping selection of Morningstar Category will be used.

8. Click Hide Peer Analytics.

9. From the Data Set menu, click Save.

Identifying the Number of High-Quality Holdings for a Bond Fund Overview


Identifying the Number of High-Quality Holdings for a Bond Fund

OverviewThe calculated fixed-income data points in Morningstar Direct do not include an average credit quality among them, which makes the data in the Fixed Income Exposure Analysis tool all the more valuable. There, users can see not only the portfolio weight invested in different credit rating groupings, but also the extent to whether high-quality or low-quality holdings offer exposure to different effective duration values. This section contains an exercise showing users how to change the exposure being displayed in the Fixed Income Exposure Analysis tool, and how to further investigate those holdings.

Exercise 4: Change the component settings to show the Count

By default, the Fixed Income Exposure Analysis tool shows users both Credit Rating and Effective Duration as attributes. The portfolio weight for each intersection is shown. To instead see the count of holdings for each credit rating and effective duration, do the following:

1. The Analyst-Rated Bond Funds screen should be open, with the Calculated Fixed-Income Data data set showing.

2. Under the US Fund Corporate Bond grouping, click the name of the fund with the largest allocation to the AAA rating. The default Managed Investments Analytical View opens.

Note: The values shown in the Grid for the Credit Rating data points are based on Long-Rescaled values. This will be important soon.

Identifying the Number of High-Quality Holdings for a Bond Fund Exercise 4: Change the component settings to show the Count


3. From the Analytical View menu, select All Analytical Views > Fixed Income Fund.

4. Select the Exposure Analysis tab. The sum of the portfolio weights for the different credit ratings is shown in the Total row.

Note: The Total value for the sum of the AAA column does not match the data just seen in the Grid. This is because the data here shows the Net sales position by default, whereas the data in the Grid uses the Long-Rescaled sales position by default. The same value from the Grid could be seen here simply by changing the Component Settings to point to Long Rescaled as the Sales Position, but that is not the focus of this exercise.

Identifying the Number of High-Quality Holdings for a Bond Fund Exercise 4: Change the component settings to show the Count


5. Take note of the largest weights by each Effective Duration row across all credit ratings, as well as any negative values (which indicates a short position). To see how many positions are represented by these weights, from the Component Settings menu, select Exposure > Count.

Note: Whenever Credit Rating is used as an attribute (either as a row or column), individual holdings are always hidden in the Fixed Income Exposure Analysis tool.

6. Click away from the Component Settings menu to close it. In reviewing the intersections that had the largest weights, how many different bonds are held in each one? What does this tell you about the risk associated with these exposures? Is the fund truly diversified in these areas, or is it holding relatively few bonds in a very concentrated way? For intersections with a negative value (where the fund is shorting those positions), how many bonds are held?

Identifying the Number of High-Quality Holdings for a Bond Fund Exercise 5: Review a fund’s holdings for negative weights


Exercise 5: Review a fund’s holdings for negative weights

As noted, users cannot see fund holdings in the Fixed Income Exposure Analysis tool when Credit Rating is used as an attribute. Considering the short position for some of the AAA-rated holdings for the fund selected in the previous exercise, it would be good to know which holdings this applies to. However, given what was seen for the Count data, a reasonable inference may be made by using a different component. Do the following:

1. Select the Holdings tab.

2. Click the Portfolio Weight % column header to sort that column in ascending order. The negative positions should now be at the top. How many holdings have a negative weight? It should match the number seen in the Fixed Income Exposure Analysis tool when Count was shown as the Exposure setting.

Finding Countries with Concentrated Interest Rate Risk Overview


Finding Countries with Concentrated Interest Rate Risk

OverviewFunds in the Nontraditional Bond category have a tendency to follow a go-anywhere approach. This can leave investors exposed to a number of regions and countries around the world. World Bond funds also have potential exposure to a wide range of countries and regions. What kind of interest rate risk are they exposed to in each area? This section offers the following exercises to uncover that information:

g Exercise 6: Change the attributes for a fund on page 17, andg Exercise 7: Review a fund’s potential performance with the Scenario Analysis tool

on page 20.

Exercise 6: Change the attributes for a fund

To change the attributes to display region and country information by effective duration, do the following:

1. From the Grid panel, select the first fund in the US Fund World Bond category.

2. Select the Exposure Analysis tab.

3. In the Control Panel, remove Credit Rating from the Columns area.

4. Drag-and-drop Effective Duration from the Rows area to the Columns area.

5. From the Available Attributes area, drag-and-drop Region into the Rows area.

6. From the Available Attributes area, drag-and-drop Country into the Rows area, below Region.

Finding Countries with Concentrated Interest Rate Risk Exercise 6: Change the attributes for a fund


7. From the Component Settings menu, select Exposure > Portfolio Weight.

Note: Contribution can be chosen as an Exposure only when Effective Duration is the first attribute listed in the Rows section.

8. Click away from the Component Settings menu to close it.

9. To make it easier to see the data, click Hide Control Panel >.

Finding Countries with Concentrated Interest Rate Risk Exercise 6: Change the attributes for a fund


10. To focus on the Region information first, click the Total item above the first column, then select Collapse All. Which region has the largest exposure for the selected fund?

11. Expand the Eurozone region. What is the portfolio’s weight to Greece?

12. In the Grid panel, select the PGIM Global Total Return A fund.

Note: Selecting a different fund displays the Control Panel once again, and resets the table to have all rows expanded.

13. Scroll down to see this fund’s exposure to Greece.

Finding Countries with Concentrated Interest Rate RiskExercise 7: Review a fund’s potential performance with the Scenario

Analysis tool


Exercise 7: Review a fund’s potential performance with the Scenario Analysis tool

One pre-defined scenario using the Morningstar Risk Models examines how funds would perform if the 2010 Greek Crisis were to recur. To compare how two funds from the World Bond category would do if this should recur, do the following:

1. The PGIM Global Total Return A fund should be selected in the Grid panel. Select the Scenario Analysis tab.

2. Check the box to select the first fund in the US Fund World Bond category group.

3. In the Scenario Trend chart, click the Component Settings icon to select Scenarios > 2010 Greek Crisis.

4. Click away from the Component Settings menu to close it.

5. Repeat steps 3-4 for the Scenario Metrics chart. Which fund is poised to do better from an absolute perspective, and which is expected to deliver higher Alpha?

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