Mutual Funds

Mutual Fund Share Classes

MorningStar is a generally accepted authority on divides most stocks into classes or types. The use eight type designations: Distressed, Hard Asset, Cyclical, Speculative Growth, Aggressive Growth, Classic Growth, Slow Growth and High Yield. Each designation defines a broad category of investment characteristics. Stocks are assigned to a type based on objective financial criteria and MorningStar's proprietary algorithm, so stocks of the same type have similar economic fundamentals. Every stock has individual idiosyncrasies, but in general, when evaluating investments, many of the same concerns and evaluation methods will apply across the stocks in one type. By establishing stock types one has an easy way to narrow down the stock universe to those best filling specific investment needs. Stock Types also help you quickly determine the diversification level of portfolios. For instance, you might discover that most of your holdings are categorized as Speculative Growth. If you want to lessen the portfolio's risk, you could invest in other types of stocks.

MorningStar's classes/types are:

Distressed

These companies are having serious operating problems. This could mean declining cash flow, negative earnings, high debt, or some combination of these. Such "turnaround" stocks tend to be highly risky but also harbor some intriguing investments.

Hard Asset

These companies' main businesses revolve around the ownership or exploitation of hard assets like real estate, metals, timber, etc. Such companies typically sport a low correlation with the overall stock market and investors have traditionally looked to them for inflation hedges.

Cyclical

Cyclical companies core businesses can be expected to fluctuate in line with the overall economy. In a booming economy such companies will look excellent; in a recession, their growth stalls, and they might even lose money.

Speculative Growth

Don't expect consistency from speculative growth-companies. At best their profits are spotty. At worst they lose money. In fact, many companies never make it beyond speculative growth, going instead to bankruptcy court. That's why they're speculative. But current profitability isn't what makes speculative-growth companies interesting. It's future profits. Hopefully, a speculative-growth company will eventually blossom into a world-class company.

Aggressive Growth

Aggressive-growth companies show a bit more maturity than their speculative-growth counterparts: They post rapid growth in profits, not just in sales-a sign of more staying power. At this point, it's time to make some money.

Classic Growth

These firms are in their prime and have little left to prove. The best classic growers have blossomed into money machines, churning out steady growth, high returns on capital, positive free cash flows, and rising dividends. The catch is, their growth is nowhere near that of the aggressive-growth group.

Slow Growth and High Yield

The growth of these companies is a fading memory. Having run out of attractive investment opportunities, most of them pay out the bulk of their earnings in dividends expect - high payout ratios - rather than plow the profits back into their businesses.