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Reading the X-Ray Tool

Getting under the bonnet of your portfolio is an invaluable way of identifying potential trouble spots

Adam Zoll 2 December, 2014 | 4:31PM

Question

I use Morningstar's Portfolio X-Ray tool to analyse my holdings but don't understand all of the data points I find there. Can you provide an overview?

Answer

The Morningstar X-Ray tool is a great way to analyse a group of holdings. Looking at data for a stock, fund or ETF can tell you about its composition and performance individually, but the X-Ray tool aggregates this data for all the holdings in a portfolio to give you a picture of the portfolio's overall characteristics, helping you identify potential trouble spots. The tool is designed for Morningstar.co.uk Premium Members who track their portfolios using the Portfolio Manager tool.

To better understand the data shown in the X-Ray tool, let's take a closer look at each section shown on the X-Ray Overview page, moving from top to bottom.

Asset Allocation: A breakdown of the portfolio's holdings by asset class, broken into long, short and net positions. (Long positions are those held in the hope that a security increases in value, short positions are held in the hope that a security loses value, and the net is the difference between the two.)

World Regions: A percentage breakdown of the portfolio's stock holdings by geographic region.

Stock & Fixed Income Sector: A percentage breakdown of the portfolio's stock and bond holdings by sector. You'll also find a breakdown for your chosen benchmark so you can see how the portfolio's composition compares to that benchmark. Note that the Fixed Income sector percentages relate only to the fixed income assets of your portfolio and not to the entire portfolio.

Stock & Fixed Income Style: For stocks (the Valuation graphic), a percentage breakdown of the portfolio's equity holdings based on the Morningstar Style Box. Holdings (or, in the case of funds, underlying holdings) are divided by market cap (large, medium, and small) and style category (value, core, and growth). To the right is a style-box breakdown of bond-fund holdings by interest-rate sensitivity and credit quality. (Note that not all holdings are classified, so total percentage may not add up to 100%. Also, for the bond-fund style-box breakdown, holdings are assigned based on each fund's style-box assignment rather than by slotting each of the fund's underlying holdings in the appropriate square of the style box. The net effect is that an investor's bond holdings may appear less diversified across the style box than they actually are.)

Stock & Fixed Income Stats: A variety of statistics about the portfolio's stock holdings, including those held by funds in the portfolio. Each includes a comparison to the chosen benchmark. Here's a description of each of these statistics:

Price/Earnings: Price/earnings ratio for the coming 12 months based on consensus analyst estimates of company earnings

Price/Cashflow Ratio: The stock’s price dividend by the company’s cashflow per share

Price/Book Ratio: The stock's price divided by the company's book value

Effective Maturity:  The date on which the principal of a debt instrument, i.e. a bond, is due to be paid. For example, the maturity date for a five-year bond issued on 1 November 2014 would be 1 November 2019

Effective Duration: The average time to payment. Also a measure of the effect of interest rate changes on the price of a fixed income asset or portfolio. Duration is defined in years (a three-year duration means the value of the bond could rise about 3% if interest rates fall by 1%)

Average Credit Quality: The average rating applied across the portfolio’s bond holdings, based on their quality and safety. Bonds with ratings from AAA to BBB- are deemed to be ‘investment grade’ while BB+ and below are known as ‘speculative grade’

Fees: An asset-weighted average ongoing charge for the entire portfolio.

Top 10 Holdings: A list of the portfolio's 10 largest holdings as a percentage of portfolio assets, with the asset type, the date of its most recent portfolio data (used in the X-Ray analysis), the ongoing charge (if applicable) and the weight in the portfolio.

Top 10 Underlying Holdings: A list that aggregates the portfolio’s holdings and identifies the ten largest underlying holdings as a percentage of assets, with the asset type, sector and region for each security. If this section reveals to you that despite holding 10 seemingly diversified funds, a total of 6% of your aggregated assets are in one particular stock, you might want to think twice about buying any more of that stock.

Using the Data

Looking over these X-Ray statistics is an excellent way to get to know your portfolio better. Reviewing a list of your individual holdings is fine, but it can't give you a holistic view of what you own the way the X-Ray tool does. Most of all, X-Raying your portfolio can help alert you to potential trouble spots, such as an over-allocation to one part of the style box, to a particular stock sector, or to a region of the world. It also helps you figure out just how much you are paying overall to have your money managed.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Adam Zoll  is an assistant site editor with Morningstar.com, the sister site of Morningstar.co.uk.