Q3 2014
Research Themes
©2014 Morningstar, Inc. All rights reserved.
Q3 2014
What are Research Themes?
Broad research ideas that inform the
thought leadership content currently
produced by Morningstar’s global
research analyst teams.
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Q3 2014
Research Themes
Internal Use Only
The purpose of this deck…
IS…
BY PROVIDING…
►
To tell a research story
►
A thematic overview
►
Provide topical conversation-starters
about industry and market-driven
trends
►
Morningstar’s research perspective
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Relevance by client segment
►
Content package
►
Educate and inform internal
constituents about high-level
research ideas and topics
►
Relate how the research helps
investors across client segments
►
Showcase the full suite of research
offerings and capabilities around
each specific theme
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Q3 2014
Research Themes
This Quarter’s Themes
1. Fairly-Valued Global Equity Markets
2. Passive Gets Active
a. Strategic Beta
b. ETF Managed Portfolios
3. Articulating the Value of Financial Advice in
Retirement
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Theme #1
Global equity markets are fairly valued,
presenting few buying opportunities
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Theme #1
Fairly Valued Global Equity Markets
When we roll up our proprietary
valuation ratings for global stocks, we
see that global equity markets are fairly
valued. Europe and North America are
the most overvalued regions. Both our
analyst-driven ratings, as well as our
quantitative ratings, tell this story.
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Theme #1
Fairly Valued Global Equity Markets
Analyst
driven
Among the ~1400 global stocks covered by our equity analysts, the median stock
is 3% overvalued, in our opinion.
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Theme #1
Fairly Valued Global Equity Markets
Quantitativel
y driven
Our quantitatively-driven Fair Value Estimates provide insight on a much larger
universe of stocks – nearly 50,000 – and allow us to provide insights on the
valuations of equities by country. (June 30)
8
Theme #1
Fairly Valued Global Equity Markets
Morningstar economists and analysts provide insight on macroeconomic trends…
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• Demographics Will Limit
Longer-Term Economic
Growth to 2.0% to 2.5%.
• Housing Market Poised For
Better Performance.
• While the U.S. Federal
Reserve Will Continue to
Tighten, Other Central
Banks Are Boosting
Liquidity.
• Growth pickup in Germany
and Spain was offset by
weaker conditions in Spain,
Italy, and Netherlands
• Signs of economic
slowdown in China, with
reverberations to Thailand,
Philippines, and Indonesia
• Global Inflation continues
to ease
• The Australian economy is
set to see a further
moderation in its growth as
the peak of the mining
boom looks to have passed
• The Chinese growth slow
down seen in the first half
is likely to ease, despite
structural challenges in its
finance system
• Elsewhere in Asia the
outlook is mixed although
we look to weaker growth
to that seen in recent
quarters
Andrew Brunner/ Global
• Consumers Lift Spending
as Incomes Rise.
• Q3 Weakness in US
(presumably weatherrelated) was offset by
robust growth in Japan
Brad Bugg/ Asia-Pac
• Labor Markets Tighter than
You Think.
Francisco Torralba/ Global
Robert Johnson/ US
Comments as of July 2014
• Global growth set to
rebound led by a strong US
recovery in consumer and
business spending.
• In Europe, although EU
economic momentum has
stalled, monetary stimulus
should provide H2 support,
while further strong,
balanced GDP is predicted
for the UK.
• In Asia, Japan’s H1 “boom
and bust” to give way to
modest growth, while
China’s Premier Li
reaffirmed his 7.5% growth
target despite the property
slump.
Theme #1
Fairly Valued Global Equity Markets
…and the relationship with market valuations.
• Beware of deteriorating
moats, which can cause
severe, permanent capital
impairment. Don’t sacrifice
quality in search of an
undervalued stock.
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• Europe, Japan, and
emerging markets look to
be the most attractive
equity markets
• Global property values
have appreciated and
medium-term return
prospects for REITs is not
compelling
• Shift from growth assets to
defensive assets, with
overweight in cash and
fixed interest
• Australian equity market
slightly overvalued
• Australian financial stocks
offer the best value
currently
• New Zealand growth
already priced into equity
valuations
Andrew Brunner/ Global
• Continue to favor
companies with strong
competitive advantages
and reasonable valuations,
which can deliver returns in
line with or better than the
market with less downside
risk.
• US stocks are heavily
overpriced, though US
large cap stocks look
relatively more attractive
than small cap stocks
Joel Bloomer/ Australiasia
• U.S. stocks look
moderately overvalued by
almost any measure. There
are very few buying
opportunities.
Ibbotson Associates/ Global
Matt Coffina/ US
Comments as of July 2014
• Medium term overweight in
equities retained in a low
return world with minimal
returns expected from
bonds and cash.
• Volatility to rise as interest
rates move to centre stage
at a time of fairly full
valuations, especially in the
US.
• Best value found in EU and
Japan, while the UK and
EM are rated neutral and
the US modestly
underweighted. Dollar
likely to strengthen.
Theme #1
Equity Markets: US
Within the US, every category is fairly valued to overvalued, according to our
quantitative ratings. Stocks with Economic Moats and Low Uncertainty Ratings
are trading at moderate premiums.
Data as of June 30, 2014
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Theme #1
Equity Markets: US
By sector, US utilities stocks are the most overvalued at the median based on
Morningstar quantitative equity ratings. In contrast, healthcare stocks are the
most undervalued.
Data as of June 30, 2014
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Theme #1
Our Equity Research Offerings
►
Morningstar Equity Research helps investors navigate the current market
environment with insights into stock valuations and quality of the underlying
businesses (Economic Moats).
Morningstar Rating for Stocks (Star Rating)
►
►
►
Identify stocks that are trading at discounts/premiums to our Fair Value
Estimates
Economic Moat & Economic Moat Trend
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Identify companies with sustainable advantages that protect their economic
profits
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Determine whether the competitive position is strengthening/ weakening over
time
Morningstar Wide Moat Focus Index
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Equal-weighted 20 cheapest wide-moat stocks based on price/ fair value
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Beat over 95% of large-cap active funds since inception
Theme #1
Equity Research Offerings for Advisors
Morningstar Equity Research helps advisors add value to the work they do for
their clients by offering recommendations and research reports on individual
stocks. Our analyst reports are easy to read, understand, and share with
clients. Our quantitative ratings provide insights on valuations and Economic
Moats of many stocks that aren’t followed by most brokers.
Products
× Available in all advisor-oriented platforms (Analyst Research Center,
Advisor Workstation, Office, Direct)
× Ratings and reports can be licensed for direct enterprise distribution via
feeds, IWT, Markets
× StockInvestor Newsletter, Pick Lists, and Model Portfolios
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Theme #1
Equity Research Offerings for the Buy-Side
Morningstar Equity Research helps portfolio managers and institutional investors
analyze thousands of global stocks, as well sectors and equity investing themes,
through our differentiated emphasis on Economic Moats. We offer an
independent alternative to the short-term focused, biased research from
brokers, with strong demonstrated performance. Our quantitative ratings
provide insights on valuations and Economic Moats of many stocks that aren’t
Products
followed by most brokers.
× Institutional Equity Research content available through Morningstar Select
and Direct
× Analyst-driven ratings and reports accessible via Bloomberg, Factset,
Thomson platforms for entitled clients
× Quantitative ratings available for a very large universe of stocks
× Direct analyst access enables valuable discussions of companies,
industries, and Moats with our 90+ equity analysts
× Annual Management Behind the Moat Conference
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Theme #1
Equity Research Offerings for Individual Investors
Morningstar Equity Research allows individual investors to monitor the holdings in
their portfolio and find new investment ideas. Our analyst reports are written in a
clear, consistent way that helps individual investors to understand individual
companies, sectors, and themes without jargon.
Products
× Morningstar.com, Morningstar.ca, Morningstar.co.uk, Morningstar.com.au
× Currently delivers our analyst-driven ratings and research; quantitative
ratings to be launched soon
× StockInvestor Newsletter
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Theme #2: Passive Gets Active
Assets are flowing into passive
investment vehicles that are increasingly
active in their nature and
implementation– the line between active
and passive is more blurred than ever
before
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Theme #2
Passive Gets Active: A Secular Shift to Passive
Asset flows into passive investment vehicles have
been growing steadily for the past two decades. (US
equity funds & ETFs)
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Theme #2
Passive Gets Active
The latest chapter in the secular shift towards
passive investments is being driven by strategic
beta ETPs and ETF Managed Portfolios.
Alternatives to traditional market cap-weighted
index funds
Actively-managed portfolios of passive funds
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Theme #2
Strategic Beta
Internal Use Only
Clients need help navigating this new and rapidly-growing
asset class
×Education
×Identification
×Analysis
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Theme #2
Background: Strategic Beta
Strategic beta refers to a broad and growing category of
indexes and exchange-traded products that seek to enhance
returns or minimize risk relative to a traditional market capweighted benchmark.
Strategic beta ETPs occupy the space
between active and passive investing by
tracking benchmarks that exploit many of
the same sources of return (size, value,
quality, momentum, etc.) as active
managers.
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Asset growth in strategic beta products has
outpaced the broader ETP category. 31% of
net new cash flows to US ETPs went to
strategic beta products in 2013.
Theme #2
Background: Strategic Beta
Morningstar is in a unique position to analyze the features,
benefits, and limits of strategic beta ETPs.
×
What drives investor interest in strategic
beta ETPs?
×
►
What is Morningstar’s research
perspective?
40 years of academic research showing that
►
returns can be explained by exposure to
►
various risk factors (“beta factors”)
×
Oriented around a specific investment thesis/
objective
×
Financial and technological innovation
×
Rules-based, transparent, tax-efficient, liquid,
low-cost
►
►
►
►
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Ben Johnson: Strategic ≠ “smart”
Jeff Ptak: Don’t overpay for beta, regardless of
whether it’s packaged as a strategic beta
product
Paul Kaplan: Use strategic beta to execute
contrarian strategies
John Rekenthaler: Some beta factors are more
tried-and-tested than others
Identify winners and losers by strategy and
attribute
Put them into context of broader opportunity set
(i.e. Morningstar Category)
Theme #2
Current Capabilities: Strategic Beta
Morningstar’s strategic beta research and commentary build on
a company-wide strategic initiative to create tools and products
to help clients understand, analyze, and capitalize on
this growing space.
Products
Research
• Leverage global, quantitative,
qualitative, and indexing expertise
• Thought leadership and
commentary
• 276 proprietary indexes
• 120 global strategic beta funds
under analyst coverage
• 37 licensed ETPs
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• 558 strategic beta ETPs
identified worldwide
Theme #2
Upcoming Offerings: Strategic Beta Data Points IDENTIFICATION
Morningstar’s proprietary classification schema
helps investors identify the index construction
methodologies and objectives underlying strategic
beta ETPs to facilitate apples-to-apples comparison.
Tag strategic beta ETPs
Characterize the
orientation of the
underlying index
construction process
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Describe the stated
objective that the
underlying index aims to
exploit
Theme #2
Upcoming Offerings: Strategic Beta Commentary
Morningstar 2014 Global Strategic Beta Landscape
Report
× Strategic
× US
Beta update in…
(Ben Johnson)
× Europe
× Asia
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(Gordon Rose)
(Jackie Choy)
Theme #2
Strategic Beta Research for Buy Side
Morningstar’s deep research expertise offers buy
side clients additional confidence about the
strategies, firms, and processes underlying strategic
beta
products.
Products
× Manager
× 120
Research Services
strategic beta products under active analyst coverage
× Morningstar
Direct
Analytics
× Strategic
beta data points and attribute categories for over 550 strategic beta
products
× Morningstar
Style Box- map value and size factors
× Morningstar
Rating- assess relative risk-adjusted performance
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Theme #2
Strategic Beta Research for Asset Managers
Morningstar helps asset managers create strategic beta products, analyze
performance, and educate wholesalers and clients.
Products
× Morningstar
× For
Indexes and licensed ETPs
example, ticker MOAT
Analytics
× Strategic
beta data points and attribute categories for over 550 strategic beta
products
× Morningstar
Style Box- map value and size factors
× Morningstar
Star Rating- assess relative performance
Education
× Analyst
speaking engagements and webinars
× Commentary
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Theme #2
Strategic Beta Research for Asset Managers
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Theme #2
Strategic Beta Research for Advisors
Morningstar research and analytics help advisors understand how strategic beta
ETPs can fit in a portfolio.
Products
× Morningstar
Direct/ Advisor Workstation/ Office
Analytics
× Portfolio-level
× Strategic
analysis and hypothetical illustrations
beta data points and attribute categories for over 550 strategic beta
products
× Morningstar
Style Box- map value and size factors
× Morningstar
Star Rating- assess relative performance
Education
×
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Thought leadership and commentary
Theme #2
Strategic Beta Research for Individuals
Analyst videos and commentary help individual investors better understand
strategic beta products.
Individual Investor Content
× “Factors
×
101”
Introduction to risk factors
× “What
the Heck is Smart Beta
Anyway?”
×
Q&A on alternative indexing and
active/passive hybrid strategies
× “Passive
×
History of active/passive blend funds
× “The
×
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or Active”
Good, the Bad, and the Ugly”
The best and worst ETFs of 2013,
including iShares factor ETFs
× Become
a Better Index Investor
(.com video)
×
Roundtable on active and passive
strategies, factor investing, and more.
Theme #2
Background: ETF Managed Portfolios
ETF managed portfolios are investment strategies with more than 50% of assets
in exchange traded funds. This is one of the fastest-growing segments in the
managed account universe.
Asset growth in 2013
US strategies under
coverage
+107 strategies in Europe
Total US ETF managed
portfolio assets
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Theme #2
Background: ETF Managed Portfolios
What has been driving asset growth in ETF Managed Portfolios?
Current Benefits
Opportunities for Growth
►
A simple way to implement a
strategic asset allocation
►
ETF portfolio managers are making
inroads with platform gatekeepers
►
Tactical solutions targeted at
minimizing overall portfolio volatility
►
Rapid growth in the RIA channel
►
Regulatory changes
►
Many asset allocation options
►
Daily pricing of client portfolios
►
►
Fiduciary standard/ fee-based billing
models
►
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UK Retail Distribution Review
Lower-cost, broad-based
investments
Theme #2
ETF Managed Portfolio Research for Asset Managers
Morningstar can help asset managers benchmark strategies and performance.
× Proprietary
classification of US ETF Managed Portfolio universe
Universe
• Global
• International
• United States
× ETF
• All-Asset
• Alternative
• Balanced
• Equity
• Fixed Income
Portfolio
Implementation
• Hybrid
• Strategic
• Tactical
Managed Portfolio Landscape Report (US & Europe)
× Selecting
× Attribute
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Asset Breadth
a Benchmark for ETF Managed Portfolios
Profiles
Primary ETF
Exposure Type
• Broad Market
• Sector
• Country/Region
• All-Inclusive
Theme #2
ETF Managed Portfolio Research for Advisors
Morningstar can help advisors and institutional buy side analysts determine
whether ETF managed portfolios are appropriate for clients’ investment
objectives.
× Morningstar Investment Management (MIM) & Morningstar Investment Services
(MIS)
× Accessible
in Office/ Direct:
× Robust
database of US ETF Managed Portfolio universe to screen strategy
attributes
× Hypothetical
× ETF
Illustrations and Portfolio Analysis
Managed Portfolio Landscape and Attribute Profile reports
× Videos
× Solutions
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Center
Theme #3
Generational shifts and technological
innovations compel advisors to articulate
the value of financial advice in retirement
35
The target audience for the material in
this theme is non-MIM sales people. The
objective is to enable you to provide
basic information about our capabilities
in asset allocation.
36
Theme #3
Value of Financial Advice
Current challenges and opportunities for the advisor segment
Clients…
►
NEEDS are changing
►
ATTITUDES are adjusting
►
CHALLENGES are growing
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Advisor strategies…
►
Client education re: retirement
planning at the core
►
Service and systematization as a
focus
►
Leverage dedicated, independent,
professional asset management
Theme #3
Value of Financial Advice
With the shift toward passive investing and the rapid growth of web-based
advisory technology and services (“robo-advisors”), Morningstar builds on
earlier research on gamma to articulate the benefits of financial advice
Increase in certaintyequivalent income
Optimal allocation
adjustment
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Theme #3
Value of Financial Advice: Gamma
Morningstar’s Take:
►
►
“Advisor alpha” = Gamma
In retirement and during major life events, advisors can help make financial
planning decisions and provide personalized guidance that is not available in
automated solutions.
►
Retirement risks differ from asset accumulation risks
►
Retirement success is not to have income for a certain number of years; the
goal is to create income for life.
►
Utility-adjusted income portfolio
39
What is Total Wealth?
×
×
Total Wealth = Investment Portfolio + human capital + real estate + pensions
(including Social Security)
Human Capital = an individual’s earning power
×
×
×
×
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As human capital declines and financial capital grows as earning power diminishes with age
All of these sources of wealth should be incorporated in designing
individualized, more efficient portfolios for investors
Advisors can create total wealth portfolios optimizing for assets beyond just
financial wealth
Plan sponsors can create total wealth portfolios by building a custom targetdate solution that incorporates many of these factors
Q3 2014
Looking Ahead…
Internal Use Only
Potential themes for Q4 2014 and new supporting research content:
1. Passive Gets Active
2. Alternative Investments
Manager Research- Morningstar Barrons’ 2014 Alternatives Survey
MIM/ Ibbotson- Alternatives in target-date fund3
3. Solutions-oriented Investing
MIM/ Ibbotson- Quarterly Target-Date Industry Update + Glide Path Stability Update
MIM/ Retirement- Comparing Managed Accounts vs. Target-Date Funds
MIM/ Retirement- Optimal Glide Paths for Accumulation and Distribution
Manager Research- Target-Date Landscape Update, Target-Date Comparison Report
4. Emerging Markets
Manager Research- Tracking Efficiency in Chinese ETFs
MIM/ Ibbotson Associates- Asian market commentary
5. Volatility
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Q3 2014
Summary
Internal Use Only
The research curation team is the primary interface between our
global research teams and the client solutions and marketing teams
This quarter’s themes are
1. Fairly Valued Global Equity Markets
2. Passive Gets Active
3. Articulating the Value of Financial Advice in Retirement
Look out for our inaugural “Insights” deck
A version of this deck will be uploaded to SFDC
Connie is going to create a commercial for each of the three themes
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