Morningstar CEO’s Vision Of ‘Active Personalization’

Morningstar CEO Kunal Kapoor believes a concept called “active personalization” will contribute to the future of investing, and could help investors navigate a heavily undervalued market. 

The company’s chief executive pointed to the Morningstar Fair Value Indicator—which he said has had success predicting the movement of the market—during the keynote address at the company’s investment conference in Chicago Monday afternoon. 

“You're seeing that our analysts think that the market is about 16%, undervalued,” he said, adding that flows had favored passive investing recently. While the market shifts, the type of investors visiting the Morningstar website has changed in a meaningful way.  

“We've seen meaningful year-over-year increases in visits among the 18- to 24-year-old age group. [It] is not the regular type of investor we used to see five or 10 years ago, but it is also the type of investor that is going to power your practice in 10 years, in 15 years,” he said, addressing an audience of about 2,500 financial professionals.  

The concept of “active personalization” that Morningstar is promoting is really designed for this type of investor.  

“At Morningstar, we believe active personalization is the new active investing,” Kapoor said. “It blends traditional approaches with more modern ones to create a new way to help you serve your clients in a personalized, scalable fashion.” 

He outlined the three pillars supporting the initiative: returns, supported by winning strategies; risk, addressed through personalized portfolios; and sustainability.  

“We're going to reframe sustainability as investability. And for that, I'm going to ask you to set politics aside and really think about sustainability [regarding] how your clients think about risk and reward, because investors increasingly want both sides of ESG—risk mitigation and being rewarded for making a difference in the world,” Kapoor said of the final pillar.  

“You can show them how to do these things, even though they're not the same, as well as demonstrating the trade-offs that they might need to make,” he added. “This is, at the core, an investing discussion. It's one you should be able to embrace easily.” 

1 Million Products Ahead 

Kapoor also highlighted the importance of Morningstar’s qualitative and quantitative rating systems that have track records of 10 years and five years, respectively.  

“Our team has been doing a really good job of sorting funds for excess returns and spotting the bad apples early so you don't have to have them in a client's portfolio. And our ratings in this context are living up to the promise of helping investors pinpoint winners,” he said.  

This is important, Kapoor says, because the number of available investment products increases by 11% every year, with more than 1 million projected to be in existence five years from now.  

He notes that Morningstar is using artificial intelligences to try to keep up with rating the rapidly growing fund universe and slowly beginning to blend the qualitative and quantitative ratings systems together via a new portal, whereas previously they had been kept largely separate. 

“This is a personalized research experience that's going to debut in our Morningstar workstation and Morningstar Direct in the third quarter of this year,” Kapoor said.  

Risk Comfort Range & Sustainability 

Kapoor also outlined the purpose of Morningstar’s new Risk Comfort Range, which is designed to evaluate an investor’s risk tolerance as well as the risk presented by the products they hold or are considering. Morningstar’s software can suggest a portfolio that is more suitable for the client’s level of acceptable risk.  

In discussing the Risk Comfort Range, Kapoor pointed out that the ARK Innovation ETF (ARKK) has a risk score of 241, meaning it is nearly 2.5 times riskier than the broad market.  

ESG risk is another element of portfolio risk, and Morningstar has developed metrics for that as well, having integrated it into its overall methodology around risk factors and taking into account positive and negative impact, Kapoor says.  

“Similar to risk tolerance, sustainable impact is never absolute. It varies in magnitude, or relevance, based on the investor's choice—it's another face of personalization,” he added. He further notes that Morningstar has developed a sustainability survey that encompasses six themes to evaluate an investor’s commitment to the concepts and provide a way of measuring the trade-offs they have made over time.  

Direct Indexing The Ultimate Solution? 

“All of this leads to direct indexing, which we think is the best opportunity to combine all these ideas—returns, risk and impact—to create a bespoke portfolio that meets the modern definition of investability,” Kapoor said as he began to wrap up his keynote, stating that Morningstar’s pilot direct indexing program is set to launch in June, followed by a full rollout before the end of the year. 

The initiative will allow advisors to start with a Morningstar index and create a customized portfolio in a guided process that will consider aspects like capital gains and tracking risk, he says.  

“We believe this is a chance for you to be a navigator for growing a pool of investors and to grow your practices with them. We're going to help you with the tools to do that, and together we're going to help investors win, because when they win, we all win,” Kapoor concluded. 

Contact Heather Bell at [email protected]