Morningstar takes on the index giants


Index providers are charging premium prices for commodity products, according to Dan Lefkovitz, Morningstar strategist. And it’s not as if investment benchmarks are in short supply.

The Index Industry Association (IIA) counted over 3.7 million investment indices in its second annual survey last year, representing an increase of almost 440,000 (or 12 per cent) over a year.

But Morningstar expects the free angle would likely prove attractive to more fund managers who have been stung in recent years by the rising costs of benchmarking their products to big brand indices.

As previously reported, the Morningstar free index offer applies only for product benchmarking purposes. However, Tim Murphy, Morningstar’s Sydney-based director of manager research, Asia Pacific, said the index fees for product manufacturing (such as building an exchange-traded fund – or ETF) were much lower than competitors.

Murphy and Lefkovitz were in NZ last week drumming up support for a benchmark revolution among local managers. At least one NZ manager, Pathfinder, has switched to the Morningstar free benchmark services.

“There’s pressure on fees across the investment business,” Lefkovitz said. “But index providers are just about the only ones who have been able raise prices above inflation over the last few years.”

Interestingly, he said Morningstar had seen a bigger-than-expected take-up offshore among managers looking to use the new indices for product creation.

For instance, JP Morgan recently launched four ETFs in the US costing about half the standard price for similar funds, Lefkovitz said.

The Societe Generale-owned funds management firm, Lyxxor, also rolled out two ETFs on the back of Morningstar indices in 2018 touted as the lowest cost in Europe.

All told, Morningstar now has about US$56 billion (across 95 products) linked to its indices and a further US$200 billion pegged to the research house’s benchmarks.

The Morningstar figures, of course, pale in comparison to the ‘big three’ benchmarkers – FTSE Russell, S&P Dow Jones and MSCI – who between them have index-linked assets of about US$45 trillion, split almost evenly.

Lefkovitz said the three large index firms control up to 80 per cent of the fund market globally for benchmarking and product creation.

However, he said the indexing oligopoly was ripe for disruption after years of consolidation and rising prices. Morningstar launched its ‘open index’ project in 2016 to provide free, or ultra-cheap, benchmarking options: over 100 are now available under the program.

Despite slight nuances between the various mainstream indices, ‘beta’ benchmarks were virtually “interchangeable” over time, Lefkovitz said.

“Essentially, beta is a commodity product and there is no real differentiation between the index providers,” he said. “If there’s no IP [intellectual property]in beta then the cost should be zero.”

Morningstar, though, is looking to compete beyond benchmarking (where its free offer sets a low bar) and into the product creation game.

The researcher plans to tune its index-making skills into four market trends: the rising passive tide; the growth of ‘smart beta’ or factor investing; increasing use of multi-asset funds; and, the sustainable investment phenomenon.

As the IIA data highlights, building indices to order is a growth industry.

“Indexing used to be a sleepy corner of the market,” Lefkovitz said. “But today the number of indexes far exceeds the number of listed stocks, which shows there’s lots of explicit demand for investable products linked to benchmarks.”

– David Chaplin, Investment News NZ