International Equity Style Box

The international equity style box is a three-by-three grid for visually representing and comparing risk-return structures of foreign stocks and foreign funds. Investors use the international equity style box, a variation on Morningstar’s stock style box, to understand the degree of diversification of their international portfolios.

The international equity style box, also known as the international stock style box, is a two-dimensional grid. The horizontal axis measures value and growth characteristics, which breaks down into three sections: value on the left, growth on the right and blend in the middle. The vertical axis measures capitalization and breaks down into small, medium and large. This scheme produces nine categories with which to classify investments.

If investors assign each of the foreign investments in their portfolio to a square on the international equity style box, they will get a simplified picture of the degree of diversification. If their portfolio is not sufficiently diversified, the international equity style box will make it immediately apparent which investment categories are not yet represented.

The difference between the equity style box and the international equity style box lies in the sizing system. Whereas the equity style box determines the size of mutual funds by the geometric mean of market capitalization, the international equity style considers median market capitalization. The three broad categories are less than US $1 billion, $1 billion to $5 billion and more than $5 billion.

Investment research firm Morningstar introduced their proprietary style box in 1992. Its simple, effective visual classification system soon made it ubiquitous in the investment world. Its simplicity and ubiquity remain two strong reasons to continue to use the style box in its several forms, but it has its limitations.

For one, the style box does not include short positions in its classification system. That means a long-short investment strategy can’t be represented in the style box. Some other strategies are not committed to a consistent growth, value or blend approach. Investment products managed by these strategies will bounce all over the style box as the nature of their holdings shifts along the horizontal axis.

Some analysts have speculated that the popularity of the style box unduly restricts fund managers who may avoid certain sound investment strategies because they would cause the fund to change categories in the style box, which may frustrate shareholders who bought into the fund partly because of its style box classification.