Morningstar cuts index benchmarking fees to zero

Through the launch of its Open Indexes Project, the fund tracker is now offering free access to more than 100 global equity indexes and hopes to build a brand as well

Nov 3, 2016 @ 1:25 pm

By Jeff Benjamin

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Morningstar Inc. is backing into the investment products price war by offering free access to more than 100 global equity indexes through the launch of its Open Indexes Project.

This means asset managers, advisers and financial services firms that might otherwise pay an index provider to use a particular benchmark could cut of costs by benchmarking to a Morningstar index for free.

“A lot of this is about servicing our clients, and trying to do more for them for what they're already paying us, but it also gives us an opportunity to raise the profile of our indexes,” said Geoff Balzano, senior vice president of strategic business development with Morningstar's index business.

To be clear, this is not about giving away licensing agreements to asset managers that are creating investments pegged to any of Morningstar's more than 350 indexes. This is only offering free access to companies that are pegging their performance to a Morningstar index.

Assets in investable products that track Morningstar indexes were at $23.8 billion as of the end of the third quarter, compared with $17 billion a year ago.

There are now 54 exchange-listed products tracking Morningstar indexes.

Morningstar doesn't break out how much money it makes on index licensing agreements, but that business will not be impacted by the Open Indexes Project, according to spokeswoman Nadine Youssef.

Mr. Balzano said those firms that are currently using Morningstar indexes to benchmark their performance will no longer be charged a fee.

“By helping our clients lower their cost structures we feel like it helps them lower their fees,” he said. “But it is not in any way contingent on their doing business with us.”

Matt Collins, head of U.S. products at ETF Securities, described the move as an effort by Morningstar to beef up its name recognition in the indexing space.

“Some of the big names place a high emphasis on their brands, and Morningstar is trying to garner higher brand recognition,” he said. “I would guess they're also hoping for some cross-selling of their analysis data.”

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, also saw it as a brand-recognition play, but he believes it will also create more opportunities for funds to benchmark to an index for which they are better suited.

“I think there's a greater opportunity for active funds to use Morningstar indexes to show they're outperforming an index,” he said. “I would dispute that market-cap weighted indexes are virtually interchangeable. They are not all the same, and a fund that chooses one over another will have a different level of success.”

In a prepared statement, Joe Mansueto, chairman and chief executive officer of Morningstar, stressed the benefits to the end investors.

“Fund investors today are paying substantially lower fees than when we opened our doors more than 30 years ago, [but] one industry cost that's moving in the opposite direction is the fee charged for indexes used to measure and compare relative investment performance,” he said. “This benchmarking process is extremely important. But only a handful of index providers control the vast majority of the market, and those providers are using their power to dramatically increase fees.”

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