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Indexing in a Changing World - Morningstar Institutional Conference Session Recap

Market indexes have evolved considerably from their origins as measures and benchmarks. Investors today need a broad tool kit of indexes for the purposes of analysis and portfolio construction.

Market indexes have evolved considerably from their origins as measures and benchmarks. Investors today need a broad tool kit of indexes for the purposes of analysis and portfolio construction. In this session, Morningstar’s Content Strategist Dan Lefkovitz explained how the company’s indexes—from traditional beta to strategic beta—can serve as lenses through which to view market behavior as well as next-generation rules-based passive strategies.

 

Dan Lefkovitz: The investment world has changed radically in recent years. We have seen this huge secular shift from traditional actively managed funds to passive investments and exchange traded funds.

In Morningstar Indexes, we have created over 350 indexes. Some of them are traditional beta, so, trying to reflect a market or a market segment; some of them are what we called strategic beta, commonly known as smart beta, so, passive rule-based strategies that try to deliver something differentiated from a risk-and-return standpoint.

Now, if you take the fundamental fair value estimates that are issued by Morningstar equity analysts, and you roll them up to a various equity indexes around the world: the Morningstar US Market index, the Morningstar Global Markets index, Europe and Asia……what we see almost across the board is over-valuation. So we have had bull market for several years, and valuations are stretched here in second quarter of 2017.

Some of our strategic beta strategies on Morningstar Indexes have taken more selective approach to equity investing. So what they do is they take the economic moat rating of Morningstar equity analysts, and the fair value estimates, and they pick the highest quality, lowest price stocks in various markets and market segments, thereby achieving overall lower level of portfolio valuation versus the beta benchmarks.

We have the Morningstar US wide-moat focus index that has nearly a 10-year track record. We have now extended the moat focus family to include Europe and Asia and global markets as well, which select the moat-rated stocks with the most attractive valuations, thereby offering more portfolio upside in an age when it’s hard to find value in the equity markets. 

Watch other recap videos here.

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