US-listed investment research house, Morningstar, has released a new range of multi-asset indices for Australasian investors.
Elle Kuhta, Morningstar index product manager Australia and NZ, says in a paper that the just-launched Target Allocation Index products enable investors to benchmark “performance of multi-asset funds across five risk tolerances—conservative to aggressive”.
“Aligned with the… Morningstar Category Classifications, the indexes are the first allocation benchmarks to follow a consistent construction approach across regions,” Kuhta says. “Utilising the Morningstar database of multisector fund portfolio holding data, the indexes reflect home bias, currency exposure, and local asset class preferences.”
Based on the Morningstar multi-sector fund data for Australian and NZ managers, the new benchmarks use average asset allocation “within the stock, fixed income, and cash sleeves” of the cohorts.
“This aligns the indexes with actual investment behaviour of multi-asset managers,” Kuhta says. “Short-term fluctuations in the asset mix are smoothed out by using a three-year look-back period.”
She says the Morningstar indices solve some of the problems in benchmarking multi-asset funds that historically have followed ad hoc processes.
“In some markets, [multi-asset funds] lack benchmarks altogether, leaving investors in the dark. Others use peer group averages, which are not investable, can reflect heterogeneous groupings, and flatter a fund that is the best of a bad bunch. Still others use a single asset class benchmark or measure themselves against somewhat arbitrary and noninvestable measures, such as inflation plus 4%, or easy-to-beat benchmarks, such as cash rates,” she says in the paper.
“Custom benchmarks are also common. When managers exercise discretion in assembling their own benchmark, it raises questions of independence and appropriateness, not to mention lack of comparability across funds. Stitching together indexes from a range of providers may create inconsistencies when each provider follows a different methodology. It may also introduce licensing issues for asset managers.”
Morningstar launched a range of free (for benchmarking purposes) single asset class indices in NZ in 2019 after launching its global ‘open index’ project three years beforehand.
“We see this as a possible path to lowering costs at the firm level and, ultimately, reducing charges to institutional and individual investors,” a 2016 Morningstar open index report says.
Auckland manager Pathfinder, an early adopter of the Morningstar single asset class indices, has also signed up for the new multi-asset benchmarks.
Paul Brownsey, Pathfinder chief investment officer, told media the group’s previous blended benchmark used for its multi-sector KiwiSaver funds had “created operational inefficiencies”.
“By using Morningstar’s Target Allocation Indexes, we no longer need to blend and calculate our benchmark return; it is built for us, providing greater consistency in measuring our performance,” Brownsey said.
According to the Morningstar September quarter earnings update released last week, the group’s index business “continued its strong momentum”.
The quarterly report says Morningstar Indexes revenue was up almost 87 per cent, or 83.2 per cent “on an organic basis” boosted by increased index data licensing sales, substantial fund inflows and “market growth for investable products” aligned with the firm’s benchmarks.
“In the third quarter of 2021, Morningstar acquired Moorgate Benchmarks, which will bolster the Company’s European index business and ability to grow its custom indexing solutions,” a company release says.