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20th of July 2018


Morningstar targets slice of $19tn market with in-house funds

Peter Smith

July 12, 2018 Print this page

Morningstar is to go into battle with its clients for a greater slice of the $19tn US mutual fund market as the investment research and ratings provider prepares to launch a range of in-house products.

The Nasdaq-listed group this week completed a 16-month registration process with the Securities and Exchange Commission that will allow it to launch nine mutual funds in the third quarter, said Kunal Kapoor, Morningstar chief executive.

The group’s “managed portfolio service”, which enables financial advisers to outsource investment decisions to Morningstar, already has $44bn of assets, mostly overseen by external fund managers.

Instead of Morningstar selecting external funds to include in its managed portfolio, it will rely on the in-house mutual funds as the building blocks. However, those mutual funds will be advised by third-party fund managers, including those it rates.

The group’s highly-prized industry ratings system is influential in determining the fate of fund management companies. A poor rating, or negative report from an analyst, can often trigger sharp outflows, while top-rated funds draw huge inflows.

Morningstar said its mutual funds would not be qualitatively rated by its own analysts but they would be eligible for an in-house algorithmically-assigned star rating after a three-year performance record, at which time they would become a client of the group’s research arm.

Mr Kapoor said the group’s star-rating system was quantitatively driven. “Sometimes people think there is a human there spitting this out and that is not the case,” he said.

Having started life as a boutique research provider that compiled data on 400 mutual funds three decades ago, Morningstar has become a powerhouse of the asset management industry, employing 5,000 staff, overseeing more than $200bn of assets and publishing data on 233,000 mutual funds.

Its nine mutual funds — two stock, four bond, two multi-asset and one alternative — will not be sold directly to investors but to its network of 8,000 financial advisers.

“We do not see it as a meaningful conflict with asset managers. In fact, we are working with the asset managers,” said Daniel Needham, Morningstar Investment Management’s chief investment officer. “It is also a very large market.”

He went on: “We have structures in place to make sure [investment management] is at arm’s length from research. There is structural separation of research and investment management.”

Subject to client approval, Morningstar will move $4bn-$5bn into the mutual funds in the first phase of transition.

Mr Needham said by using Morningstar’s scale and removing a layer of distribution and other costs, fees could be cut by about a fifth.

Morningstar’s business model involves fund managers paying to use a rating as part of their marketing. Investment companies do not pay to have a rating carried out in the first place.

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