A perfect storm of global market upheaval, growing investor distrust and an emerging “me generation” of global consumers has raised the bar for financial services providers. And it has created a window of opportunity for creators of global market benchmarks who sit at the crossroads of active and passive investment strategies.
As investors start to close the books on a dismal 2022 on many levels and turn the corner to 2023, I’d like to suggest three ways that index providers can help investors either stay on track or, in many cases, get back on track amid the “perfect storm.”
#1 – Chaos Requires Creativity. 2022 has been a year in which, honestly, tried and true investment approaches have not worked. Traditional equity and fixed income markets around the world have melted away before our eyes amid rising inflation and coordinated central bank monetary tightening. Quite simply, it has been a “nowhere to run, nowhere to hide” scenario for investors.
In this environment, index providers should offer market analysis and exposures that present a different lens on the markets. We don’t direct investment strategy or decide asset allocation for our clients, but through our research, data and analysis we can suggest areas that may make sense in a down market. In 2022, these have included certain energy investments, global natural resources, dividend-based strategies and bonds for income generation. We can also open investor access through our indexes to new markets such as venture capital. These approaches won’t guarantee that investors avoid the pain, but they do provide new ways to think about the current environment.
#2 – Investment Costs Matter. In addition to opening our clients’ eyes to new asset classes and investment approaches, market downturns also bring into sharper focus the fees paid by investors. I am proud of the positive role that index providers have played in the growth of index-based investing and the notable decrease in fees paid by investors in recent decades, but there is always more that we can do as index providers to further this trend.
The fees that index providers charge our asset manager clients indirectly impact end investor success, as those costs represent a hidden tax passed through to investors, diminishing the amount left in their pockets. It follows that we should always be looking for ways to provide more value. For Morningstar Indexes, we believe that broad asset class benchmarks are arguably a commodity in the industry and should be priced accordingly. At the same time, we believe in providing unique and differentiated strategic beta index solutions that deliver better outcomes and more value for every index dollar spent.
#3 – Meeting current investors on their terms and bringing new investors into the game. Providing a unique lens on the markets and offering compelling value to our clients are important, but we are not fully addressing the needs of our clients if we aren’t finding ways to tailor our index solutions to meet investors when, where and how they want to invest.
...but there is always more that we can do as index providers to further this trend.
In times of chaos and uncertainty like right now, we need to convince current investors to stay invested while encouraging new investors to get into the market by providing index-based analysis which stresses the value of long-term investing. Covering the basics on the long-term return potential of broad markets is critical.
At the same time, we also need to remember that plain vanilla will no longer cut it in an iPhone world. A new generation of investors is looking at markets through a different lens and is more receptive to new and innovative approaches to markets in areas like ESG and sustainable investing, research-driven thematic investment approaches and the emerging opportunity in private markets. We need to be looking at ways to deliver information on new and emerging asset classes and investment approaches through our indexes.
Applying our creativity and investment insight to deliver better outcomes, adding more value for every index dollar spent and keeping investors in or getting new investors into the markets. These are themes that we pursue every day at Morningstar and can be helpful themes for index providers globally in the coming year. We don’t have a crystal ball to predict where the global markets will go in 2023 and beyond, but we can manage the factors in our control. That is what investors expect.
Ron Bundy joined Morningstar in 2019 to help Morningstar Indexes pursue an aggressive growth plan. Prior to joining Morningstar, Ron spent fifteen years as CEO of Russell Indexes where he helped oversee a period of transformational growth for that global index franchise, then supported the combination with FTSE following the acquisition by the London Stock Exchange Group in 2015.