Author | Hong Ruoxin
This year is the 40th year of Morningstar.
This company, which was born in a small apartment in Chicago, USA, started from collecting basic information and data of mutual funds, and has developed into a world leading independent investment research service provider. Its business covers 33 major markets around the world, covering all links in the investment, research and investment advisory chain.
Morningstar has personally experienced the golden age of the great development of the mutual fund and investment advisory market in the United States, followed the surge of the wealth tide, and participated in the construction process of wealth management industry rules and infrastructure in many countries as an independent third party.
With the same vision, Morningstar entered the Chinese market.
In 2003, Morningstar set up an office in China and began to set foot in the Chinese market. Later, Morningstar gradually developed into a global data and R&D center. In 2010, Morningstar was the only foreign investor to obtain the qualification of China's securities investment fund evaluation business
If we want to mark several important nodes for Morningstar's more than 20 years in China, these are all labels that cannot be circumvented. But now we have to add a new turning point.
In August 2022, Morningstar adjusted the positioning and layout of the Chinese team and market after reviewing the global strategic layout. According to the new plan, China will become the key strategic development market of Morningstar Global. The team in China will focus more on the business in the Chinese market, and subtract the original global data and R&D related personnel.
After the adjustment, Morningstar (China) actually added a lot of posts in product, R&D, business analysis and other lines based on the local market, and set up a marketing department and editorial department in mainland China for the first time.
Of course, a more important vane for internal employees is that among all overseas markets of Morningstar, the General Manager of China is the only one who reports directly to the Chief Strategic Officer of the headquarters.
Michael Holt, Morningstar's global chief strategic officer and president of global investment research, visited China intensively last year, which was also regarded as a positive signal: Morningstar is "overweight" China rather than staying away.
At present, China's wealth management industry is facing a transformation, and the investment advisory business is poised. "Morningstar will actively invest more resources to become part of the story of China's wealth transformation," said Michael Holt during his recent visit to China.
How to participate more deeply in the wave of China's investment adviser transformation? How to copy overseas experience to the Chinese market? How to develop more decision-making tools suitable for Chinese investors? These are new topics for Morningstar (China).
In the 21st year of entering the Chinese market, Morningstar is about to start a new story.
Not only fund rating
In China's investment market, most people's impression of Morningstar comes from its fund rating.
As one of Morningstar's most famous products, Morningstar Rating, which was born in 1985, not only created a comprehensive evaluation system that took into account the performance and risk of public funds, but also changed the one-sided perception of American investors that they paid too much attention to historical returns at that time.
Later, Morningstar has continuously enriched and improved its evaluation index system. In addition to Morningstar fund rating, Morningstar has also derived Morningstar investment style box, Morningstar sustainable development rating, Morningstar medal rating, etc. Based on data, Morningstar has provided many professional and comprehensive decision-making tools for individual and institutional investors.
(Note: Morningstar star rating is mainly based on the performance of historical risk adjusted returns of funds relative to similar funds, and aims to rank funds according to their historical performance, rather than forward-looking ratings. In contrast, Morningstar medal rating is a forward-looking rating, which aims to identify funds that are expected to obtain excess returns in the future. It evaluates the investment advantages of funds and distinguishes them to help investors choose high-quality funds.)
Morningstar DBRS is the fourth largest credit rating agency in the world, covering far more than funds. It also provides independent credit ratings for financial institutions, corporate issuers, governments and structured financial products.
In 2020, Morningstar also wholly acquired the world's leading sustainable investment research and rating agency Sustainalytics, extending its reach to sustainable investment, green finance and other fields. At present, Morningstar Sustainalytics is also one of the largest green bond and green loan evaluation agencies in the world.
Data has always been regarded as the background of Morningstar and the foundation of its global business map.
According to Feng Wen, General Manager of Morningstar (China), all products and services provided by Morningstar can be summarized as four capabilities. Data - tools - investment research - investment consultants, evolving from bottom to top, and each layer can be independently extended.
At the same time, from the perspective of industry, Morningstar, as one of the largest independent investment research institutions in the world, has covered data services and rating businesses in several sectors, such as funds, stocks, bonds, private equity markets, and sustainable investment.
It is not complicated, but it is in this vertical and horizontal space that Morningstar has formed an independent logic system and industrial ecology around "investment", effectively combined software, data, research and rating capabilities, and formed products, tools and services for export.
Since its establishment 40 years ago, Morningstar has evolved from a company that initially provided basic fund information and data analysis to a world leading independent investment research service provider through internal business expansion and external investment acquisition.
From the perspective of revenue structure, its main business segments in the world can be divided into three parts:
License based: investment and research services for data analysis and research capabilities.
Asset based: investment advisory services for investment strategy and configuration suggestions.
Transaction based: collect one-time transaction fees such as credit rating and advertising.
According to Morningstar's 2022 financial report, its annual revenue exceeded $1.8 billion. The revenue of the above three businesses was $1331.7 million, $269.4 million and $269.5 million, respectively, accounting for 71.2%, 14.4% and 14.4% of the total revenue.
At present, Morningstar's two major businesses based on subscription based and transaction based fees have been in the Chinese market for many years, serving many leading asset management institutions and wealth management institutions in China.
Asset based investment advisory services that have not been able to enter China before are regarded as the starting point of the new phase of Morningstar (China).
"This is the most unfamiliar part for many Chinese investors to Morningstar." According to Feng Wen, Morningstar has been involved in the investment advisory business since the late 1990s. Morningstar is a pioneer and the most important participant in the American investment advisory market. At present, Morningstar has become one of the largest investment advisory institutions in the world, with a management scale of more than 260 billion dollars.
In the investment advisory sector, Morningstar can provide a variety of products and services, including asset management, investment advisory strategy, enterprise retirement account management, and so on. Among its customers, there are many world-class wealth management institutions, such as Fidelity, Merrill Lynch, Citigroup, and other well-known enterprises in the world, such as Wal Mart.
Feng Wen believes that independent perspective, global perspective, self formed ecology, and decades of practical experience have created a distinctive Morningstar, which is also its unique value in the Chinese market.
The new subject of "localization"
This is not the first time Morningstar (China) has faced the challenge of "localization".
In 2003, when Morningstar entered China, its first test was how to apply its very mature fund rating system to China's public fund market. At that time, it was only two years before Hua'an Innovation, China's first open-end fund, was launched.
According to the index requirements of Morningstar rating, the fund must have more than 3 years of performance before it can be considered.
A skillful woman cannot make bricks without straw. At that time, Morningstar (China) was facing an emerging market that had just started. By the end of that year, 34 fund companies in China had issued more than 100 products, with a total management scale of only 171.6 billion yuan.
Later, Morningstar also carried out a lot of "localization" transformation of its core products and tools in combination with the specific situation of the Chinese market and industry rules. Morningstar's "Five Stars" rating has also become one of the earliest and most authoritative reference indicators for Chinese people to select funds.
In the past 21 years, Morningstar (China) has deeply participated in and witnessed the development of China's public offering industry. From another perspective, Morningstar's business layout in China is also deepening with the growth of the domestic wealth management market itself.
According to the statistics of China Securities Fund Association, by the end of November 2023, the number of domestic public funds (by portfolio) has reached 11391, with a management scale of 27.45 trillion yuan.
If you take a broader view, according to McKinsey's statistics, by the end of 2022, the personal financial assets of Chinese residents had reached nearly 250 trillion yuan, becoming the world's second largest wealth management market.
There is no doubt that China's wealth management market is taking off rapidly and experiencing a new transformation under the background of interest rate marketization, breaking the rigid exchange rate, and housing speculation. In the face of such opportunities, no organization is willing to miss them, and Morningstar is no exception.
In Feng Wen's view, Morningstar (China)'s strategy in the next stage can be seen from two dimensions: first, at the user level, actively develop products and tools for C-end users (individual investors); Second, at the business level, we deeply participated in the investment advisory and wealth management business industry chain.
For example, the "first shot" of the expense tool for individual investors, which was launched recently, is the first shot.
In fact, cost has always been one of the core indicators in Morningstar Fund evaluation system. Take the famous Morningstar global medal rating as an example, which is the comprehensive evaluation result of forward-looking analysis of the fund's investment strategy, including gold, silver, bronze, neutral and negative.
For actively managed funds, Morningstar will give gold, silver and bronze ratings to those investment instruments that can create added value or "positive excess return" in the long term in the future compared with Morningstar's sub index after considering costs and risks.
For passive strategies, Morningstar will give gold, silver and bronze ratings to those investment instruments whose excess returns can be greater than the median alpha after fees of similar funds or greater than zero (whichever is lower) in the future. (Note: Morningstar defines "long-term" as a period of at least five years.)
Michael Holt said that Morningstar's research shows that in the European and American markets, the level of fund fees is often the most reliable factor to predict its future performance. Therefore, this indicator has always been one of the key factors for investors to select funds.
However, in the Chinese market, the issue of fund fees has not received sufficient attention from investors.
On the one hand, this is related to the professionalism of Chinese investors, who are not accustomed to paying attention to these hidden data information; On the other hand, more importantly, with the development of China's capital market over the past decade, public funds can obtain sufficient excess returns. In contrast, the cost problem has naturally been ignored.
As we all know, the process of fund investment can be roughly divided into three stages: buying, holding and selling, each of which will generate corresponding costs. For example, the one-time fees paid in the process of purchase and redemption are familiar to the citizens.
But in fact, investors pay more for a fund than that.
Compared with the one-time deduction of fund redemption fees, the holding cost is shared equally among all investors and deducted directly from the fund assets, so it is difficult for the funders to have a direct perception. The net value of the fund you see is the result of deducting various fees, but few people pay attention to the specific items of the fees.
Morningstar carefully disassembled this "muddle headed account" and sorted out the holding costs of Chinese citizens.
According to Morningstar, the holding cost of basic people is divided into explicit cost and implicit cost. The former includes management fees, custody fees, sales service fees, etc., while the latter covers more deeply, including some operating fees, transaction fees, etc.
According to Yang Tao, the head of the product department of Morningstar (China), in fact, all the rate data can be found in the semi annual report and annual report publicly disclosed by the fund, but they are all presented in the form of absolute amounts. It is difficult for investors to form a comprehensive and clear concept, and even more difficult to make horizontal comparisons between different products.
Now Morningstar digs out these rates and converts them into a percentage form, forming a tool based product. Investors can quickly query the comprehensive cost of their funds.
In Yang Tao's view, understanding the cost of holding funds helps to improve long-term returns and holding experience; The deeper reason is to learn about the potential conflict of interest in the implicit rate, for example, why some funds are not top performers but can be pushed by sales agencies to make more rational choices.
"Fund markets in different countries and regions have their own specific rules, and the data and standards disclosed are also different." Yang Tao believes that although Morningstar has a very comprehensive and solid research foundation and methodology on fund fees, it still needs to make significant adjustments in combination with the Chinese market.
To "localize" Morningstar's experience in the world into a solution suitable for the Chinese market and further integrate with the wealth management industry in China is the direction that Yang Tao's product team and Morningstar (China) are working towards.
21 years later
It is no accident that Morningstar chooses "cost" as the starting point to open a new chapter in the next stage.
In China, funds make money and institutions make money, but the pain point of people not making money has long existed. However, despite the appeal of public opinion and the promotion of supervision, the "product centric" business model of the wealth management market has not developed a fundamental change.
The root of this is that the interests of fund companies, sales channels and investors are not consistent under the seller's market. The dismantling of investors' costs has undoubtedly opened the black box. So, how high is the holding cost of Chinese base people?
In terms of management fees alone, the data shows that in 2022, the public fund industry will obtain a total income of 145.8 billion yuan, and the scale of customer service fees paid to sales agencies will reach 41.3 billion yuan, accounting for 28%. In other words, in addition to fund companies, nearly one-third of them are included in the pockets of various sales channels in the form of customer maintenance fees.
Statistics show that in 2022, the total expenses borne by investors in the domestic public offering market will exceed 300 billion yuan. (Data source: CICC report)
Morningstar, taking the data of the semi annual report of funds in 2023 as an example, calculates that the holding costs of equity funds and hybrid funds are 1.72% and 2.36% respectively, and the average holding costs of bond funds in the first half of 2023 are 1.08%.
Don't think this is petty profit. The power of compound interest should not be underestimated.
Suppose you invest 10000 yuan in an active partial equity fund, and its annual yield before fees is 10%. If there is no holding cost, this amount will become 25937 yuan in 10 years. However, if the overall holding cost of the active equity fund is 2.61% in 2022 (i.e. Morningstar comprehensive rate index, which includes the management fee, custody fee, sales service fee, transaction fee, and other operating fees withdrawn from the asset scale on an annual basis), you can actually get only about 20400 yuan 10 years later.
In fact, looking around the world, the cost of Chinese public funds is extremely high. In this way, we can also understand why in recent years, regulators have frequently "fired" at rates.
The issue of fees touches on the root of the business model. It changes the existing pattern of interest distribution by reducing fees and transferring profits, and promotes wealth management institutions to complete the transformation from a "seller's market" with sales as the core to a "buyer's market" with services as the core, so as to truly enhance investors' long-term sense of gain.
This is also the meaning of Morningstar (China)'s continuous research on cost and development of rate query tool.
In fact, similar stories were staged in the United States. In the 1970s, with the entry of pension funds into the market and the rapid development of mutual funds, the United States Congress revised the Securities Exchange Act, removing the minimum limit on the commission of mutual funds through securities trading.
Under the promotion of the policy, the "commission free" fund represented by Pioneer Pilot came out, which attracted the whole market to open the commission "internal volume" and attract investors through voluntary commission reduction or commission free.
Of course, in the process of the birth and prosperity of the investment advisory business in the United States, the regulatory policy is just a "catalyst". The volatility of the capital market, the changes in the needs and habits of investors, and the active innovation of market participants are all factors that cannot be ignored.
"Morningstar has a lot to do, not only to deeply integrate with more businesses, but also to participate in the construction of industry infrastructure as an independent third-party company.".
Feng Wen took investment advisory as an example to introduce that Morningstar has not only accumulated rich experience in investment advisory business, but also laid out various links of the investment advisory industry chain through acquisitions in recent years. For example, SMArtX, which specializes in portfolio management, and FinaMetrica, which solves KYC problems.
In addition, Feng Wen said that Morningstar is also the fourth largest index provider in the world, with a rich number of indexes and wide coverage. In the future, Morningstar also hopes to participate in index customization and product innovation in the Chinese market.
ETF can achieve perfect tracking of indexes at a low cost, and has a stable style, rich categories and diversified risks. It has always been an important part of long-term configuration, and is complementary to investment advisory business. Especially since last year, China's regulatory authorities have repeatedly stated that they will relax the registration conditions of index funds and encourage market innovation.
Now, looking at the Chinese market, including the rapid development of the "third pillar" of pension, the changes in investor preferences in the volatile market, and the outbreak of ETF products this year, changes and signs all indicate that the critical point of the take-off of investment advisory business is approaching.
The transformation story of China's wealth management market has just begun, and Morningstar hopes to leave more marks in it.
Lightell
Record good companies and stories in the "big wealth management era", and gain insight into industry changes and future trends.
contact us: Lightell@126.com
Source of this article: Guangshu Lightell, author: Hong Ruoxin, original title: New Story of Morning Star 21 Years after Entering China
