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Creat ing and Work ing wi th Custom Asset C lasses in Morn ingstar Of f ice

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Overview - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -1

Creating a Custom Asset Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Overview - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -2How do I create a custom asset class? - - - - - - - - - - - - - - - - - - - - - - - -2

Applying a Custom Asset Class to a Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Overview - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -4How to apply a custom asset class to a standard security - - - - - - - - - - - - - - -4How to apply a custom asset class to a user-defined security - - - - - - - - - - - - -7How to alter the asset class composition for a user-defined security - - - - - - - - - -8

Displaying Custom Asset Classes on Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Overview - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -9How to create an asset allocation reporting set - - - - - - - - - - - - - - - - - - - 10How to apply a custom asset allocation reporting set to a report - - - - - - - - - - 12How to create a target asset allocation for the Current vs. Target Report - - - - - - 13

Including Custom Asset Classes in Investment Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Overview - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 14What is the Correlation Suitability Test? - - - - - - - - - - - - - - - - - - - - - - 14How to create a custom set of market assumptions - - - - - - - - - - - - - - - - 15How do I create a Target Asset Allocation for an investment plan? - - - - - - - - - - 18

Creat ing and Work ing wi th Custom Asset C lasses in Morn ingstar Of f ice

OverviewIn Morningstar Office, users have the ability to create custom asset classes via the Definition Master, similar to creating custom securities. Creating your own asset classes has a number of benefits.

For instance, you can use custom asset classes to maintain consistency with the wording you use throughout your practice. Whereas Morningstar might use “Large Core” as a label on a report, you might prefer to use “Large Blend.”

You can also use custom asset classes to fill in gaps where the standard Morningstar asset classes don’t provide coverage—such as for individual commodities, infrastructure or more.

This document covers how to do the following:

• create custom asset classes• reclassify securities under custom asset classes• use custom asset classes in reports, and• include custom asset classes in investment plans.

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Creating a Custom Asset Class Overview

Creating a Custom Asset Class

OverviewThis section explains how to create a custom asset class in Morningstar Office. Once a custom asset class is created, it is automatically available for custom reports and market assumption sets (for use with investment plans).

How do I create a custom asset class?

To create a custom asset class in Morningstar Office, do the following:

1. From the menu bar, select Tools…Edit Definition Master. The Definition Master window appears.

2. From the left-hand navigation pane, select Asset Classes.

3. In the grid view, you will see a list of asset classes. If you have not yet created a custom asset class, the list will contain only the 35 pre-defined asset classes that make up the default Morningstar Asset Class Reporting Sets. To add a custom asset class to the list, click the Asset Class Wizard icon on the toolbar at the top of the screen. The Asset Class Wizard opens.

Click once on this option Click once to select this option

Click once on this option

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Creating a Custom Asset Class How do I create a custom asset class?

4. Fill in the following fields with the appropriate information:

5. Click OK. The asset class has been added to the list. You can now apply this asset class to securities, and include it in custom reports and market assumption sets.

Field Description

Asset Class Name How the asset class will be listed in portfolio reports.

Description

This field is for your own reference. You can use the Description field to type a more detailed definition of the asset class, which will appear in the Definition Master but not in reports.

Reporting BenchmarkThis benchmark is used as a point of comparison when you run the Portfolio Benchmark Comparison Report.

Planning Benchmark

The historical performance of this benchmark is used within an investment plan as the basis for both the projected return and standard deviation for the asset class.

Broad Asset Class

Specify the broad asset class under which the asset class falls. This information will be used in reports showing asset allocation by broad (rather than specific) asset classes, such as the Account Snapshot report.

Tax-Exempt Status

This information is used only in investment plans, and does not affect standard reports. If the asset class is exempt from one or more taxes, adjustments will be made to both the projected taxable income and the capital gains for securities of this asset class

Note the sample information entered here

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Overview Applying a Custom Asset Class to a Security

Applying a Custom Asset Class to a Security

OverviewThis section explains how to apply a custom asset class to a security—whether it is a standard security available in Office, or one you created via the Definition Master.

You will also learn how to alter the detailed asset class composition for a user-defined security.

While some information for a standard security tracked by Morningstar remains largely static (name, ticker symbol, etc.), the asset class could change over time. Applying a custom asset class to a security, then, allows you to control this variable. Doing so, though, impacts a number of reports, Any security you reclassify will be listed under its new, custom asset class on the following reports:

• Portfolio Benchmark Comparison• Performance by Asset Class • Performance History by Asset Class • Portfolio by Asset Class, and• Portfolio History by Asset Class.

The Current vs. Target Asset Allocation and Current vs. Model reports will not display custom asset classes, unless a custom Asset Allocation Reporting Set has also been created. See page 10 for more information on creating a custom Asset Allocation Reporting Set.

How to apply a custom asset class to a standard security

To apply a custom asset class to a Morningstar-tracked security, do the following:

1. From the menu bar, select Tools…Edit Definition Master. The Definition Master window appears.

2. From the left-hand navigation pane, select Reclassification. The Reclassification screen lists any Morningstar-tracked securities with a custom asset class.

Click once to select this option

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Applying a Custom Asset Class to a Security How to apply a custom asset class to a standard security

3. From the toolbar at the top of the screen, click Add. The Add Security dialog box opens.

4. In the Within drop-down menu at the top of the window, select the universe in which the security is located.

5. Choose a search criterion (Name, Ticker, etc.), type a search term, and click Go. 6. The search results appear in the Available Records window. When you see the security

you want, click on the security name within the Available Records window, then click Add. The security is moved to the Selected Records window.

7. You can run multiple searches before closing this window. To begin a new search, simply repeat steps 4-6 until the Selected Records window contains every security you are looking for, then click OK to close the Add Security dialog box.

Click this icon to look up securities you want to reclassify

This search looks for any open-end fund containing the word “gold” in its name

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How to apply a custom asset class to a standard security Applying a Custom Asset Class to a Security

8. The list of securities now appears in the Reclassification screen. Before changing a security’s asset class, you must change its Classification Source from Morningstar to User defined. Click the Classification Source cell and select User defined from the drop-down menu.

9. In the Classification column, click the magnifying glass icon. The Security Reclassification dialog box appears.

10. Click the Reporting Asset Class drop-down field, and select the asset class you want to assign.

Any custom asset classes you have created will be on this list. You can also choose from among existing Morningstar asset classes. This determines how the security will be categorized in reports.

11. In the Composition table, type numeric values to specify how the asset will be categorized in portfolio asset allocation breakdown reports, as well as investment plans. Custom asset classes will also be on this list.

Most likely, you will assign a composition consisting of 100% of the custom asset class. However, if the security is a fund with multiple underlying holdings, you might wish to enter a breakdown of multiple asset classes.

12. Click Save + Close. The reclassification process is now complete.

Select this option from the drop-down list

Click here to select the new asset class

You can assign the full value to a single asset class, or diversify it among multiple asset classes

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Applying a Custom Asset Class to a Security How to apply a custom asset class to a user-defined security

How to apply a custom asset class to a user-defined security

User-defined securities are custom securities you create. You can import or manually create any security not found in Morningstar’s research database. This usually includes security types such as cash, fixed income, or derivatives. User-defined securities are stored in the Securities area of the Definition Master.

To apply a custom asset class to a user-defined security, do the following:

1. From the menu bar, select Tools…Edit Definition Master. The Definition Master window appears.

2. From the left-hand navigation pane, make sure Securities is selected. 3. Right-click on the security you wish to change and select Edit. The Security window

appears.

4. Under the Attributes section on the Basic tab, click the Asset Class drop-down menu to select a custom asset class.

5. Click Save + Close to complete the update.

After right-clicking onan item, select Edit from the drop-down menu

Select a custom asset class from the list

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How to alter the asset class composition for a user-defined security Applying a Custom Asset Class to a Security

How to alter the asset class composition for a user-defined security

If a user-defined security is comprised of multiple underlying holdings, you might wish to enter a specific asset class composition to better portray this detail. While the security will still be broadly categorized under the asset class (e.g., Open-End Fund) you assigned it to, Morningstar Office will integrate the more specific asset class breakdown into reports showing portfolio asset allocation. The asset class composition will also be used in investment plans, to predict security-level returns.

To add more asset-class detail to a user-defined security, do the following:

1. From the menu bar, select Tools…Edit Definition Master. The Definition Master window appears.

2. From the left-hand navigation pane, make sure Securities is selected. 3. Right-click on the security you wish to change and select Edit. The Security Wizard

opens.4. Click on the Detail tab at the top of the screen. 5. Under the Composition area, click Setup…. The Composition Setup dialog box appears.

6. Assign a percentage to each asset class contained in the security. The percentages must add up to 100.

7. When you are finished, click Save + Close to close the Composition Setup dialog box.8. On the Security Wizard window, click Save + Close. The reclassification is complete.

Click this button to change the composition for a user-defined security

Make sure the total equals 100% exactly

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Displaying Custom Asset Classes on Reports Overview

Displaying Custom Asset Classes on Reports

OverviewThis section explains how to display securities with custom asset classes on certain reports. You will learn the following:

• how to create an asset allocation reporting set• how to apply a custom asset allocation reporting set to a report, and• how to create a target asset allocation for the Current vs. Target Report.

When you reclassify a security using a custom asset class, the security will appear under the custom asset class category in some reports, but not all. The following reports automatically show the custom asset class of a reclassified security:

• Performance by Asset Class• Performance History by Asset Class• Portfolio Benchmark Comparison• Portfolio by Asset Class, and• Portfolio History by Asset Class.

To include a custom asset class on the Current vs. Model Portfolio or Current vs. Target Asset Allocation reports, you need to create an asset allocation reporting set. (An asset allocation reporting set is simply a list of asset classes used in comparing two portfolios side-by-side, within the Current vs. Model Portfolio and Current vs. Target Asset Allocation reports.)

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How to create an asset allocation reporting set Displaying Custom Asset Classes on Reports

How to create an asset allocation reporting set

To create an asset allocation reporting set, do the following:

1. Under the Home tab (from the left-hand navigation pane), click Settings. The Settings page appears.

2. Under the Portfolio Accounting System Settings area, click Asset Allocation Reporting Sets. The Asset Allocation Reporting Set dialog box appears.

3. In the bottom left-hand corner, click New. A new dialog box appears.

Select this option

Click here to create a new asset allocation reporting set

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Displaying Custom Asset Classes on Reports How to create an asset allocation reporting set

4. Type a name for the asset class set.5. Select one of the pre-defined reporting sets to use as a starting point for the new set.

6. Click OK. You are taken back to the Asset Allocation Reporting Set dialog box. 7. In the window in the middle of the screen is a list of asset classes. This list is based on

the pre-defined reporting set you selected earlier. To add a new asset class to this list, click Add. The Add Asset Classes dialog box appears.

8. Note the Available Records box and the Selected Records box. Locate the asset class you wish to add within Available Records. Click on that asset class to highlight it, then click Add. The asset class now appears in the Selected Records area

You can also change the order in which these asset classes are listed in Current vs. Model or Current vs. Target Asset Allocation reports. To change location of an asset class within the set, highlight the asset class in the list and use the up or down arrows to adjust its position.

9. When you have added every asset class you wish to include, click OK to close the Add Asset Classes dialog box.

10. When you are satisfied with the composition of the asset allocation reporting set, click Save + Close on the Asset Allocation Reporting Set dialog box.

Type a name for the asset class set here

Select one of these pre-defined options

Once items are selected, click Add to move them to the Selected Records area

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How to apply a custom asset allocation reporting set to a report Displaying Custom Asset Classes on Reports

How to apply a custom asset allocation reporting set to a report

The set of asset classes you created can now be used in comparison reports. When running either the Current vs. Model or the Current vs. Target Asset Allocation report, you will encounter a Report Options dialog box. This dialog box includes an Asset Allocation drop-down menu. Simply select a custom reporting set from the drop-down menu and click OK.

The report you create will display asset allocation breakdowns using the customized asset class set.

Select the name of a custom asset allocation set from this field

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Displaying Custom Asset Classes on Reports How to create a target asset allocation for the Current vs. Target Report

How to create a target asset allocation for the Current vs. Target Report

In order to run a Current vs. Target Asset Allocation report, you must first create a target asset allocation in the Workspace module of Morningstar Office. The asset allocation reporting set upon which the target asset allocation is based must match the asset allocation reporting set upon which the report is based.

Do the following from the Workspace module:

1. In the left-hand navigation pane, select the Asset Allocations option.2. From the toolbar at the top of the window, click New. The Asset Allocation Profile

dialog box appears. 3. In the Model Name field, type a name for the Asset Allocation. 4. In the Based on field, click the magnifying glass icon. The Change Market Assumptions

dialog box appears. 5. From the Within field, select Asset Class Set. 6. Click Go to see all asset class sets.

7. From the list of available asset class sets that appears, select an asset allocation reporting set you created.

8. Click OK to close the Change Market Assumptions dialog box. 9. After returning to the Asset Allocation Profile dialog box, assign allocations by

percentage to each asset class on the list.10. When you are finished, click OK. The process is complete. Now that you have created an

asset allocation set based on the custom asset class reporting set, you can include that asset allocation set in Current vs. Target Asset Allocation reports.

Be sure Asset Class Set is selected in this field

Select an Asset Allocationset, then click OK

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Overview Including Custom Asset Classes in Investment Plans

Including Custom Asset Classes in Investment Plans

OverviewThis section explains how to create a custom set of market assumptions (to incorporate custom asset classes), and how to include those custom asset classes in investment plans you create from Morningstar Office. Prior to creating an investment plan with a set of custom market assumptions, it will be subject to a correlation suitability test.

What is the Correlation Suitability Test?

When you create a set of market assumptions, Morningstar Office calculates the performance correlation of all asset classes to one another based on the historical return of each asset class. (The resulting correlation matrix can be viewed by clicking on the Correlations tab of the New/Edit Market Assumptions window.)

Each time an asset class is added to a set of market assumptions, the correlation suitability test is performed for the overall matrix. In order for both the Monte Carlo simulation and auto-allocation features for an investment plan to function properly, the correlation matrix must pass the test. Namely, the market assumptions set cannot include a large number of asset classes too strongly correlated to another and performing similarly in all economic scenarios.

If the market assumption set does not pass the suitability test, you will be notified in a warning message. If this is the case, you can still create an investment plan, but the results might not be reliable.

Be sure to select the Correlations tab in this window to see this information

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Including Custom Asset Classes in Investment Plans How to create a custom set of market assumptions

How to create a custom set of market assumptions

You can create a custom set of market assumptions on which to base investment plans. To create a custom set of market assumptions, do the following from the Workspace module:

1. From the left-hand navigation pane, select Market Assumptions.

2. From the toolbar at the top of the screen, click New. The New Capital Market Assumptions dialog box appears.

3. Select one of the pre-defined reporting sets to use as a starting point for the new set.4. Click OK to close the dialog box. The New/Edit Market Assumptions window appears.

Select this option from the Workspace module

Click this icon to create a new set of market assumptions

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How to create a custom set of market assumptions Including Custom Asset Classes in Investment Plans

5. In the Name field at the top of the screen, type a name for the market assumptions set.6. The list of asset classes included in the set can be edited. To remove an asset class from

the list, check the box next to the asset class and click Delete.

7. To add an asset class to the list, click Add. The Add Asset Class dialog box appears.8. In the Asset Class Name field, click the magnifying glass icon. The Select Asset Class

dialog box appears.9. Click Go to see all available records, including any custom asset classes you created.10. Select the name of the asset class you wish to add and click OK. You are returned to the

Add Asset Class dialog box.

Type a name for the set ofmarket assumptions here

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Including Custom Asset Classes in Investment Plans How to create a custom set of market assumptions

11. The Proxy Index field populates automatically with the index associated with the selected asset class. You can change the proxy index by clicking on the magnifying glass icon in that field and selecting a different index from Morningstar’s database. The Expected Return and Standard Deviation fields automatically populate with data derived from the historical performance of the proxy index, but can be manually edited as well.

12. Click OK to close the Add Asset Class dialog box.13. Once you are satisfied with the list of asset classes included in the set of market

assumptions, you can manually edit the following fields within the Expected Returns Table:• Expected Return• Standard Deviation• Yield, and• Total Turnover values.

14. Click OK to save the new set of market assumptions.

These fields populate automatically, based on the information entered when the custom asset class was created. You can change the information if you want to.

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How do I create a Target Asset Allocation for an investment plan? Including Custom Asset Classes in Investment Plans

How do I create a Target Asset Allocation for an investment plan?

When you create an investment plan for a client, you can include a custom Asset Allocation set. That Asset Allocation set will be seen on the efficient frontier graph, and you can choose to select that allocation as the client’s target investment portfolio. You can include a custom asset allocation set in an investment plan, though, only if it is based on the same set of market assumptions used in the plan.

To create an asset allocation set using a custom set of market assumptions, do the following from the Workspace module:

1. In the left-hand navigation pane, select the Asset Allocations option.2. From the toolbar at the top of the window, click New. The Asset Allocation Profile

dialog box appears. 3. In the Model Name field, type a name for the Asset Allocation. 4. In the Based on field, click the magnifying glass icon. The Change Market Assumptions

dialog box appears.

Make sure the Within field reads Market Assumptions.

5. Click Go to see all market assumption sets.6. From the list of available market assumptions sets that appears, select the custom set

you have created and click OK.

7. After returning to the Asset Allocation Profile dialog box, assign allocations by percentage to each asset class in the list.

8. When you are finished, click OK. The asset allocation set is now ready to be used in any investment plan that is also based on the custom market assumptions.

Select the name of the custom Market Assumptions setyou want to use as the basis for the Asset Allocation lineup, then click OK

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