Morningstar Scaling Up Against Industry Dominators

Ron Bundy of Morningstar Indexes
John Lothian

John Lothian

Executive Chairman and CEO

Chicago Index Firm Sees Growth in ESG and Delivering Value to Clients

The index business is dominated by three big companies: Dow Jones Indexes, FTSE Russell, and MSCI; but there is a Chicago index company that has big plans to advance and scale up its business to bring more value to index clients and leave more money in the pockets of investors. Former FTSE Russell executive and now Morningstar Indexes Managing Director Ron Bundy is charged with the evolution and growth of Morningstar Indexes.

Morningstar has been in the index business for about 20 years, said Bundy, who joined the firm in December of 2019. Bundy said Morningstar is leveraging its well-respected research capabilities to develop investable products like ETFs and mutual funds. Bundy’s plan is to bring Morningstar’s already immense index capabilities to scale to be able to offer a full suite of beta benchmarks. He wants to scale Morningstar’s intellectual property and bring “exceptional value” to customers. Already, Bundy says, Morningstar is one of the fastest growing index firms in the world.

“We set out to bring this business to scale and provide a full-service index company, with a full suite of equity beta benchmarks, fixed income benchmarks, but also a more robust product development capability,” Bundy said last week in a Zoom interview with JLN.

“We are finding a very welcoming client base who doesn’t feel today like they are getting the value they want for the price they are paying to their traditional index providers,” he said. “So what we are doing is we are bringing world-class index capabilities to our clients, doing it at an exceptional value.”

Bundy is focusing on key fast-growing areas like ESG, private equity and thematics to offer strategic beta index products. Morningstar recently held a thematics webinar titled “Global Digital Infrastructure and Connectivity – Outlook and Opportunities.” The theme of the webinar was “With data traffic growing at an exponential rate, the importance of digital infrastructure will only continue to increase,” and the opportunities that presents for investors.

“A big part of our focus is taking IP, in particular ESG space, to really bring different forms of ESG to the market,” Bundy said. “We believe this will be the fastest growing segment of the index business in the coming years.”

Some of the clients Morningstar has worked with in the last 12 months include GPIF, BlackRock, TD Ameritrade and Jackson National.

Morningstar recently announced the launch of the Morningstar Developed Markets ex-Japan Gender Diversity Index with GPIF of Japan, the world’s largest asset owner, which weighs 19 gender equality criteria. The index is part of the sustainable indexes suite at Morningstar, which includes the Morningstar Minority Empowerment Index, the Morningstar Low Carbon Index Family, and the Morningstar Women’s Empowerment Index. 

The Morningstar Developed Markets ex-Japan Gender Diversity Index is derived from the Morningstar Developed Markets ex-Japan Large-Mid Index, which “includes large- and mid-capitalization equities from the U.S., Canada, Western Europe, Israel, Australia, Hong Kong, New Zealand, and Singapore,” Morningstar said in its announcement of the index.

The UK and Australia play a big part in the index, as 2012 Australian legislation required companies to “publish comprehensive public reports on their gender equality performance on a yearly basis and cites Australia as an example of how enforced transparency can motivate improved performance over time.”

Bundy said few new products are based on traditional capital-weighted equity or fixed income indexes, but rather customers are asking for customization. 

“Almost all new product development is in some form of customization,” Bund said. “To be able to do that quickly and do that at scale, be able to iterate with clients, take their investment thesis and put it in an index wrapper, that is where we have spent a lot of time over the last 12 months to build out those capabilities.”

Morningstar recently acquired the U.K. firm Moorgate Benchmarks, a strong technology provider in the index space that Bundy says will accelerate Morningstar’s ability to service a broader customer segment with customized solutions.

Traditionally, Morningstar has focused on the U.S. market, but it has global offices, including in Hong Kong, Japan, and the UK. “Increasingly you will see us investing in Europe in the coming years, because that is on the forefront of the growth in the index space,” Bundy said. “Europe is on the forefront in ESG investing, so we are putting our business there.”

Morningstar does not have plans right now to develop some of these indexes into derivatives products, but that could change as these products develop, Bundy said.

Bundy said his Morningstar colleague Pat Fay, who also worked with Bundy at FTSE Russell, was working with exchange partnerships and the derivatives business. “We absolutely plan on being active in the [derivatives] space moving forward.”

Speaking of his big competitors that dominate the index ecosystem and the index derivatives space, Bundy said that is where a lot of dissatisfaction is in the industry.

“Our philosophy at Morningstar is beta should be accessible and beta should be inexpensive,” he said.  “If you look at the trends happening across the investment industry, fees have been coming down across the industry, except for index benchmark data.”

“We see ourselves as a challenger brand in the index space; we see ourselves as advocates for investors, investors first,” he added.

This gets to the core of why Bundy said he went to work at Morningstar. “I wanted to work for a company that was values driven again. Our mission at Morningstar is to empower investor success.”

 

 

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