Morningstar's Mansueto: We want to offer robo to UK pension savers

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In a wide-ranging interview, Mansueto said Morningstar wanted to work with sponsors and their consultants in the UK: “We’re not out to replace consultants. We want to be their arms supplier.”

The firm already offers DC solutions to plan sponsors in the US and has $ 40 billion under management. The service, Morningstar Retirement Manager, can generate funding goals, asset allocations and recommendations. It can take into account non-DC savings held by individuals.

Mansueto says: “We can do it all with our service, or help people talk to someone.” In the US the service costs anything between five and 25 basis points, depending on what clients want to retain. He didn’t say what the UK service was likely to cost.

In the US Morningstar is also rolling out a robo-advisory services for retail investors. One involves a company called ByAllAccounts, bought for $ 28 million in April 2014, that pulls data about all their savings, including bank deposits, onto a single platform. Mansueto says: “The service is popular with advisers and they are prepared to pay for it. It brings advisers opportunities, and helps savers with their money.”

In May 2014, Morningstar bought outright control of HelloWallet, valuing the business at $ 52.5 million. The service is a budgeting tool where people can use their mobile phones to switch between bank, savings, credit card and other accounts, to save more efficiently.

In Australia, it is selling saver platforms a direct-to-consumer robo-service called Wealth Forecasting Engine, to help savers understand their future investment needs.

Mansueto says: “Artificial Intelligence has a big future. It will creep into the financial adviser space. It can construct portfolios, advise on goals and carry out asset allocation.” He stresses his support for advisers, noting the importance of human judgement. But he adds: “There is a certain neutrality about robo, which avoids bias.”

He backs the Financial Conduct Authority review of UK asset management published on November 18, which was critical of fuzzy thinking and overcharging: “We’ve been advocating transparency and lower costs for years.”

Like the FCA, Mansueto is unimpressed with products which charge an active fee while hugging the index – known as ‘closet indexers’. “When asset-gathering became a big business, managers wanted products which could fit every quarter of the style box, and avoid deviating from the benchmark. We’ve ended up with a muddle of passive-lite funds. They’re going to get washed out. The people should be fired.”

Mansueto is, however, a fan of talented active managers who add value over time. But he warns that investors also need to take a long-term view by backing managers during downturns, not selling out too cheaply when funds suffer short-term blips.

Morningstar’s own research has shown how investor behavior like this damages returns. Over ten years money invested in US international equity funds underperformed the funds themselves by an annualised 124 basis points according to research by the firm dated June 2016.

Over the years, Morningstar has put together a series of funds for clients, using a active and passive managers. Mansueto said: “We got into management when someone asked us to implement our advice, so we did.” Its portfolios are often based on value, although Manseuto stressed that growth stocks, like Google, can be value plays during periods of price weakness.

Morningstar’s best-known investment offerings include products built on its Wide Moat concept that identifies companies that deliver excess returns on capital because they are protected from competitors like a castle is protected by a moat. These products invest in stocks like Biogen, Harley-Davidson, State Street and Microsoft during periods when they are lowly-rated against the value of their franchise. Since inception in 2007 the Wide Moat Focus 20 Exchange-Traded Fund has generated a return of 118%, slightly behind Warren Buffett’s Berkshire Hathaway, whose approach inspired the style and which also appears on the Moat list.

Changing technology

Mansueto started Morningstar in 1984, using a PC in his one-bedroom flat, near Lincoln Park, Chicago. He decided to set it up following a stint at investment boutique Harris Associates, where he worked as a buyside analyst alongside legendary investor Bill Nygren. International manager David Herro signed up subsequent to Mansueto’s departure.

Mansueto says: “I found you could tap into some of the world’s best managers for pennies on the dollar. But people weren’t using them properly. They were looking at advertisements, where every fund was claiming to be number one, by using different universes and time periods.”

“Financial advisers needed help to construct client portfolios and third party validation for their ideas. I decided to bring the rigours of stock analysis to fund research. Our early product was printed from a database. Then we moved to floppy disks, to CD-Rom, to cloud and mobility. Technology has played an important role in our growth.”

Since its initial public offering in May 2005, Morningstar’s share price has risen 235% to value the company at $ 3.1 billion. Mansueto still owns a majority of the stock although he will hand over the chief executive role to Kunal Kapoor, his long-standing lieutenant, and become executive chairman, at the start of 2017.

Mansueto says: “I like to hire great people and let them get on with things and I have high expectations of Kunal. I wanted to free up my own schedule – give myself more time to think.”

Analysts believe Kapoor will maintain Mansueto’s expansion strategy. Mansueto says: “I terms of new initiatives, I wouldn’t want people to go ‘Wow’. I want us to carry on developing solutions bit, by bit, by bit and stay close to our clients.”

Morningstar currently analyses 540,000 investment offerings, plus data on 18.5 million equities, futures, indices and commodities. Its analysts rate the efficiency, or otherwise, of active and passive funds. It advised, and managed, assets worth $ 200 billion in September.

It branched out into credit research from 2008, unimpressed by the generous ratings given to sub-prime mortgages by its big rivals Moody’s and Standard & Poor’s.

On October 14, Morningstar bought PitchBook Data, which tracks investments and deals in non-quoted companies to supplement its existing service. Morningstar backed the company at inception in 2007 and October’s deal valued the firm at $ 225 million.

Kunal Kapoor has been on the PitchBook board of directors for four years, proving, if proof were needed, that Morningstar likes to take a relatively organic approach to acquisitions.

On November 2, Morningstar triggered an index fee skirmish by dropping fees for 100 of its global indices, for benchmarking purposes. Mansueto concedes his market share for indices is relatively small: “But incumbents are pretty heavy-handed, and prices keep going up. We want to be disruptive.”

Mansueto does not rule out scrapping index licence fees for exchange-traded fund providers, in a bid to grow market share. And if he decides to go ahead, that really would a stir in the highly-competitive world of ETFs.

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