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Morningstar joins race to provide direct indexing services

Morningstar Inc updates

Morningstar is the latest big name to enter the field of “direct indexing”, following in the footsteps of a handful of industry giants including BlackRock, Vanguard and Morgan Stanley.

The Chicago-based group, with operations spanning credit ratings, investment research and asset management, is acquiring indexing specialist Moorgate Benchmarks, which focuses on developing the customised and personalised indices that lie at the heart of direct indexing.

The concept allows investors to create bespoke portfolios tailored to meet their personal preferences for investment factors, such as tilts to value, quality or momentum investing or their own environmental, social and governance (ESG) beliefs.

In the US, direct indexing also allows investors to minimise their tax liabilities via tax-loss harvesting — systematically selling losing stocks and replacing them with similar holdings in order to offset capital gains tax due elsewhere in their portfolio.

Currently a niche service only available to wealthy investors, Cerulli Associates forecasts that in the US alone direct indexing strategies will account for $4.7tn of assets by 2030, 8 per cent of all adviser-managed assets, up from just $300bn in 2019.

“ESG and other drivers will lead to a future of mass or even hyper customisation,” said Tobias Sproehnle, chief executive of Moorgate who will become head of Morningstar Indexes in Europe.

“Our kids will want more flexibility than we have. They will want to swipe left and right and decide exactly what is in their basket and what isn’t.”

Parametric, a division of investment group Eaton Vance and the global leader in direct indexing, was acquired by Morgan Stanley last year in a deal that kickstarted a flurry of activity.

BlackRock bought Aperio, the industry number two, in November 2020; Vanguard made its first acquisition in its 46-year history in July when it bought Just Invest, a Californian wealth management boutique with a customisable, direct indexing service; and JPMorgan Asset Management acquired OpenInvest in June, a fintech platform that facilitates the customisation of portfolios based on ESG metrics.

The acquisition of Moorgate Benchmarks, a 20-strong, three-year-old London and Frankfurt-based company, is also part of Morningstar’s drive to muscle in on the more plain vanilla but increasingly lucrative business of providing indices for exchange traded products and other investment funds.

Morningstar is a minnow in indexing, accounting for just 0.6 per cent of the industry’s $4.1bn of revenue last year, according to analysis by Burton-Taylor International Consulting. It is the 10th largest player in the sector, well behind the controlling oligopoly of MSCI, S&P Dow Jones Indices and FTSE Russell.

However, Morningstar has the highest five-year compound annual growth rate in the industry, of 43.5 per cent, aided by last year’s acquisition of Sustainalytics, a provider of ESG ratings and research, and its “attractive pricing models”, according to Burton-Taylor.

More than $80bn of assets are now benchmarked against its indices by asset managers such as Lyxor, JPMorgan AM and BNY Mellon.

“We see this as an opportunity to be advocates for investors. When you talk to clients there is a lot of dissatisfaction about the services they get from some providers and the price they have to pay for it,” Ron Bundy, managing director, indexes at Morningstar. The former chief executive of Russell Index Group joined Morningstar in December 2019 to lead its push into indexing.

“We want to be quite disruptive in this space. To provide extreme value so investors have more money left in their pockets.”

Financial terms of the deal were not disclosed.

Morningstar joins race to provide direct indexing services

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