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©2013 Morningstar. All rights reserved.

Morningstar Quantitative Equity Research

Lauren Migliore, CFA Director of Cross-Sector Equity Research July 16, 2013

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Outline

× Approach × Methodology × Process × Performance × Reports × Morningstar Direct × Summary

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Approach Equity Research

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Approach Comprehensive Global Equity Research Coverage

1,123 Analyst Reports 13,810 Quant Reports North America

241 Analyst Reports 39,188 Quant Reports Europe

171 Analyst Reports 14,655 Quant Reports Asia

53 Analyst Reports 397 Quant Reports Latin America

41 Analyst Reports 293 Quant Reports Eurasia/India/Middle East/Africa

208 Analyst Reports 1,908 Quant Reports Australia

1,837 Analyst Reports 70,251 Quant Reports Totals by Exchange (As of May 13, 2013)

12x 162x 85x

7x 7x

9x

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× Methodology is a deliberate & consistent extension of the analyst approach

× Our DCF model (analyst model), historical data, and statistical modeling are all inputs to populate forward looking scores

× 4 key pillars + a per share $ Quantitative Fair Value × Quantitative Moat × Valuation × Quantitative Uncertainty × Financial Health

× Supplemental scores: forecast price range, momentum,

liquidity, competitive advantage trend (chart)

Approach Quantitative Research

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Methodology Quantitative Research

× Hypothesis: × Analyst Moat = f (some input variables)

× What inputs might be relevant to a moat rating? × Size, risk, valuation, sector/industry, liquidity, etc.

× Use statistical algorithm to determine f × Use the f we learned and input variables to assign new ratings

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Process Quantitative Model Input Variables

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× Quantitative Fair Value Estimate × Comparable to Morningstar’s Fair Value Estimate for stocks,

which measures a company’s intrinsic value based on a discounted cash flow model, and represents the per share value of a company’s equity. The measure is expressed in the local currency.

× Quantitative Valuation × Defined as the ratio of a company’s Quantitative Fair Value

Estimate to its last market close price, and similar to the analyst-driven Fair Value Estimate to last market close price ratio. The rating is expressed as Overvalued, Fairly Valued, or Undervalued.

Process Quantitative Equity Rating Datapoints

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× Quantitative Uncertainty × Describes the level of uncertainty around the Quantitative Fair

Value Estimate, comparable to the Uncertainty Rating for the analyst Fair Value Estimate. The rating is expressed as Low, Medium, High, Very High, or Extreme.

× Quantitative Economic Moat × Corresponds to Morningstar’s Economic Moat rating, which

measures a company’s sustainable competitive advantages. The quantitative rating is expressed as None, Narrow, or Wide.

× Quantitative Financial Health × Based on Morningstar’s proprietary measure of the likelihood of

financial distress. The quantitative rating is expressed as Weak, Moderate, or Strong.

Process Quantitative Equity Rating Datapoints

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Performance How well does our quant model match our analyst ratings?

× Less than 3% of analyst coverage universe meaningfully disagrees with direction of analyst recommendation

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Performance Backtested

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

One

Two

Three

Four

Five

1 = most overvalued quintile 5 = most undervalued quintile

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Performance Since Daily Production (June 2012)

$0.90

$0.95

$1.00

$1.05

$1.10

$1.15

$1.20

$1.25

$1.30

$1.35

6/5/2012 7/5/2012 8/5/2012 9/5/2012 10/5/2012 11/5/2012 12/5/2012 1/5/2013 2/5/2013 3/5/2013 4/5/2013

One

Two

Three

Four

Five

1 = most overvalued quintile 5 = most undervalued quintile

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Performance Country Aggregation

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Reports New Morningstar Analyst Report

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Reports Quantitative Equity Research Report Features

× Quantitative Equity Ratings × Price versus Quantitative Fair

Value Estimate comparison × Forecasted price range × Valuation data × Historical financials × Competitive Advantage Trend

chart

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C

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Demo Morningstar Direct

× Access Quantitative Equity Ratings × Search × Performance Reporting × Portfolio Analysis × Presentation Studio (3.14) × Select Investment Research

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Summary

× Greater breadth of coverage

× Philosophically analogous to our analyst-driven stock ratings

× Strongly predictive of future alpha

× Enables bottom-up insights for below-the-radar regions and sectors

× Enables portfolio analysis/attribution for uncommon holdings

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Additional Institutional Equity Research Services Analyst Access

× Engage directly with 155 equity and credit analysts via phone and email

× Debate valuation assumptions with industry-focused analysts

× Continual communication with analysts covering your current holdings

× For more information: cristina.rossman@morningstar.com

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