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Morningstar Investment Conference: Keynote With Kunal Kapoor

Morningstar Investment Conference: Keynote With Kunal Kapoor
Securities In This Article
Parnassus Core Equity Investor
GameStop Corp Class A
Vanguard Dividend Growth Inv
Brown Advisory Sustainable Growth Inv
Exxon Mobil Corp

Kunal Kapoor: Hello, everyone, welcome. It's awesome to welcome you to our conference. This year, when I was dropping my daughter off to her first day at school, she said to me that she had butterflies in her stomach. And I told her this morning that I too had butterflies in my stomach, because when was the last time, I stood up in front of so many people to do a presentation, I too have gotten used to speaking into a camera without anyone in front of me. So this is a relearning experience. But I'm so glad you're all here, we have about 2,000 plus people joining this conference. 700 of you here in person about, 1,400 digitally. And maybe it's just a small step back towards normalcy. So thank you, whether you're here in person, or whether you're joining us digitally, it's just great to be sharing this time with you. I also hope obviously that you and your families have come through this really tough period, safely, and are healthy. What a ride it's been? Right.

Amazing when you sort of step back and take stock of it. And all I'd say is that the past 19 months, have really shown the best side of financial advice from my perspective. People talk about the fact that creativity loves constraints. Research has shown in fact that when you put constraints in front of people, it provides focus, and it motivates them to generate new ideas. And I think our profession has done that, relationships have been tested, you've had to find new ways to interact with your clients. And yet, if you look at the data, retention rates are as high as they've been, the value of your advice is shining through brightly. And so at a time when the pandemic wasn't just threatening people's health, but threatening, in many cases, their financial security. It's just really impressive how you all found new ways to first of all care for your clients, and then connect with your clients. And so congratulations on that. And whether you're here or joining us digitally, I just want to say thank you, and congratulations for making it through. Thank you for innovating, learning, and growing with us. And thank you for bringing investors your best. We're really proud to empower investors in a post pandemic age. And we're going to use this conference to certainly reflect on the past, but also really start to chart a path to the future.

We hope the line up for the conference as always is going to motivate you. I was looking at it just last week and thinking wow, we've got a fantastic line up. This afternoon, my friend and colleague Daniel Needham, is going to interview both Cathie Wood and Rob Arnott to talk about two sides of the valuation argument. And really, we're in a unique space. And I think Cathie and Rob are both fantastic. And you'll see Daniel has some very strong views as well. Tomorrow economist Megan Greene will talk about the impact of inequality on our economy. Let's face it, this is a topic that maybe we were all aware of but wasn't front and centre in the way it's become front and centre. And so I think you're going to enjoy that. And then Friday, we're going to host a conversation between Morningstar's own and the Sustainalytics Founder, Michael Jantzi, and Jennifer Grancio, who is the CEO of the headline making hedge fund Engine No. 1, which you may have heard of, because of their successful move to place directors on the Exxon board. And so Jennifer is going to be here talking about that.

And then you're going to hear from all my equity and credit research colleagues, our manager research team on longer term investing in these strange times, and all the fantastic things that they're thinking about. And you'll hear from advisors like yourself, who are trying to think about the profession through new lens. And we've got sessions that I am excited to see. And so hopefully you are, sessions around China, I know it's top of mind in many ways, not just from a geopolitical perspective, but these days from an investment perspective. Your clients are more exposed to China than ever before, and yet the landscape seems to have shifted in a second. Cryptocurrency, inflation, future of energy, we've got a great agenda. I'm super excited and so glad that you could be here.

Now as part of the conference, you're also going to hear a bit from this year's winners of the Morningstar Awards for Investing Excellence. The winners as you may be aware are Fidelity's Joel Tillinghast for Outstanding Portfolio Manager. Joel's been around a very long time and has made a lot of money for a lot of people. He just does things the right way. And speaking of doing things the right way, Dodge & Cox this year wins for Exemplary Stewardship. I remember in my days as an analyst talking to them and just being blown away, even back then just about the way they thought about taking care of their clients, and they have never wavered from that. And finally PIMCO's Sonali Pier for Rising Talent. I have to admit that PIMCO does a really great job, at just unearthing great new talent and developing their people. And I think Sonali is a great example of that. So congratulations to our winners, and you'll hear from them very soon.

Now, on to a few other things, as I was reflecting on the past year, it struck me that there are more pathways to attracting and interesting people in investing today, than ever before. And this is a really important topic for all of you, as advisors. First of all, you're well aware that many of the barriers that have existed for people to become investors have melted away, fees have gone to zero in many instances, people are investing with fractional shares, private markets, which were really the purview of the super wealthy and institutional investors are starting to become accessible to your clients. Impact focus investing is a central theme today. And you have access to all kinds of data and insights. And then, of course, there are the doge memes that are selling for millions.

So wherever your clients are on this investing spectrum, you've got to meet them there. I think of my son, and I look at his portfolio, and he told me, I'm going to buy Snap and Chipotle, and I'm going to be happy. And I looked at him and said, you're nuts. Well, look who's laughing now. Point here is these new pathways, and new choices have come down to this. The face of the investor is changing. It's changed. And it's bringing you the chance to serve a broader group of clients than ever before. I can't tell you how many times I've been to conference with advisors, hands have gone up, and people have said, how do we reach beyond our traditional base of customers? Well, you have as good a chance as ever, and we're going to focus on that, in this conference.

More U.S. households are participating in the markets. And in fact, if you just look at what's happened to Google search queries around words like learning to invest, what is investing, and how to start investing, they're up more than 50% since January 2020. On our own, we've seen a nearly 50% uptake among 18- to 24-year old visitors in the past 12 months alone, and an 18% increase in the number of women investors who are coming to That's a new opportunity for you to serve investors, who we collectively let's face it, have not reached out to meaningfully before. And there are differences between investors, investors 35 and over are telling us that they care about things like packaged investments, they want dividends, so they like things like Vanguard Dividend Growth, and Exxon Mobil when they're on Yet something like Exxon Mobil doesn't even crack the top 10 most visited pages on for younger investors.

Now, I don't have to ask you to guess what younger investors are looking at on Yes, they are looking at GameStop. It's among the top 10 most visited pages. But what I will tell you is the fact that they've become investors is really important. Millennials have arrived and they're growing their dollars and that is the opportunity for you. Meanwhile, many of the clients you serve are drawing down assets, or they're thinking about transitioning their assets to others in their family. Gen X and Gen Y now represent one-third of our country's wealth, and the millennial share is also ticking up every quarter. They're also going to inherit the wealth that many of you have helped your clients build today.

So I want to talk to you about three ways that you can engage this wider pool of investors these modern investors and connect their portfolios to them like never before, three ways. The first thing I'm going to talk about is Morningstar's Risk Ecosystem. And we think in it, we've created new opportunities to develop a clear line of sight, from your client's personal situation to the assets in their account. Second, I want to encourage you to seek a conversation, that unwraps the pervasive ESG jargon, and replaces it with something meaningful, and personal. And the last topic that I'm going to spend some time on is how security selection can be as unique to your clients as they are, and for the first time, at scale.

So let me start on the first point, investors of all ages, we know this want a clear line of sight, from their own situations to the preferences that they place in the assets in their accounts. And so earning their loyalty means demonstrating that you're putting each investor at the centre of investing. Truly knowing your client and showing how you've tailored their portfolio creates a stickiness that you just can't beat. So let's talk about that line of sight and how we bring it to life through the lens of risk. I know some of you must be wondering, who wants to talk about risk in the middle of one of the greatest bull markets, well Morningstar does. The market ride at the onset of the pandemic in fact, really surfaced the need for reliable understanding of investors risk tolerance, and especially one that doesn't change as the market moves.

The reality is, every time there's volatility, you start to get a fuzzier picture of what your clients really desire and how they're likely to react. In March 2020, they were all lightening their equity allocations, the data shows that, and yet you probably wanted them to stick it out, and many missed out on the early days of the strong rebound at least. Meanwhile, the millions of investor questionnaires that have been taken in our risk profiler over two decades, show that actually investor's appetite for risk, for better return is actually relatively stable over time despite these market swings. So our Risk Ecosystem, which launched this year on our advisor software, and which is previewing here, right behind me on the screen, draws a straight line between individual investors and their investments. It means the industry can move beyond the bulk-banding of investors towards truly personalised comfort bands.

If you look at our risk profiling, it uses simple illustrations to match a portfolio risk score as we call it, which measures a portfolio model's level of risk compared to one of our target allocation indexes, with an investor specific risk comfort range. Means the days of suitability check are long gone. And instead, Morningstar is helping you with the new data that reflects the human side of advice, and helping you prepare for things like Regulation Best Interest in a very tangible fashion. You can hear more about our Risk Ecosystem from my colleagues Paul Kaplan and Sarah Newcomb, at their theatre presentation at 10:00 AM tomorrow, or stop by the Morningstar booth and take a look at how we've brought it to life within our Advisor Workstation.

Now on to the second topic that I highlighted, which is how the investor landscape is changing, because of the fact that we can't ignore environmental, social and governance considerations anymore. You've seen the headlines, we've got exploding fund flows, multiplying fund choices, a shift toward stakeholder capitalism. So investing with a sustainability lens is foundational today to how a growing number of your clients are going to want to invest. And so I'm going to make it central to this conversation and this conference. Over the past 10 years, we've seen ESG intentional ETFs increased sixfold. Now that's a big headline, but if I was to show you the active ESG funds, they're growing even faster. Meanwhile, there's a vibrant market of green bonds, and sustainability linked loans emerging. And ESG ratings, including our very own are maturing, as we are able to use even more data to power them.

If you look in the media, and this is where your clients are getting their information. The number of ESG stories today is 6.5 times greater than it was in 2018. And the term ESG was used across social media over 2.5 million times already this year, 3 times the volume of 2018. But the one that really gets me, and I think will resonate with you is that many of you, when your clients walk in to talk to you are probably asking about their 401(k) as part of your bigger plan. Today ESG is searched for on the web 2.5 times more frequently than the term 401(k). Absorb that and think about how important it is that you're able to speak that language, now. Of course, there are lots of icebergs, windmills and green landscapes. And sometimes there's not a lot behind it helping investors. And when we ask them about it, 77% of investors say they don't really understand it. But when we start to explain it to them, when an advisor starts to take away the industry jargon, almost 90% of them say they want to engage more. And that's where we think we can help because your great advice is the remedy to all the noise that investors hear every time.

So when you talk to clients, we'd encourage you to seek a conversation that goes beyond ESG. Dive deeper into the valuable data, and material risks sustainability is now bringing to long term investing. As a fiduciary, you'll find ESG offers incredibly interesting insights. And for an advisor, who's trying to look after multi-generational wealth, you can personalise a portfolio, closer and better than ever before to your clients. So investors fundamentally may not care about the term ESG. But our research is showing that they care about their financial goals, they care about risk. And they care about whether air pollution is giving their kids asthma, they care that that retirement home that they were going to buy is suddenly in a flood zone where home insurers are curtailing coverage. And they care that when they're walking into the grocery aisles, amid heat waves and droughts, they're not finding what they need.

But investors are confused, because they're also being told that investing success and personalised impact are two separate things. But they are in fact, not binary. It's not a zero-sum game anymore. And this is where we think the agent of resolution is something that we at Morningstar are introducing called The New Sustainability. The New Sustainability, we think, is the new face of long-term investing, long-term value creation. And it shows us that investors can in fact have their cake and eat it too, because investors are choosing investing success and personalised impact at the same time. In a recent experiment by our behavioural research team, investors actually allocated more money to hypothetical fund with high diversity scores. And they started to penalise funds, that in fact, didn't report ESG information.

Now, I've realised that new investing frontiers are difficult to navigate. They just don't show up with the maps. Right. But that's where you come in, and that's where we can help you. We're helping people navigate new ways to invest in this area. And The New Sustainability can take many routes. But we think they span a spectrum of six approaches that we're using based on the data that we now have thanks to our acquisition of Sustainalytics. You see these six behind me and as some are more focused on avoiding negative outcomes, others are more focused on advancing positive outcomes. They're not mutually exclusive, for sure. And investors often combined several, or all of them to varying degrees. And so rather than getting into all six, today, I'm going to focus on three that resonate with me in particular.

So applying exclusions is probably one you already know well, and I'm going to go past it and instead focus on limiting ESG risk. This is simply about avoiding investments with a high degree of what we call material ESG risk. Sustainalytics ESG Rating is the primary enabler of this approach. And it measures a company's exposure to industry specific material ESG risks, and how good a job a firm is doing in managing those risks. So let me give you an example. Let's take the firm Beyond Meat. If I say that to anybody, the assumption is they're probably doing great on all these measures. Because after all, they're addressing concerns about environmental impacts, and other things. But if you dig in, our research actually points to concerns around environmental impacts of Beyond Meat's packaging, and their farming practices.

More broadly, their lack of disclosure actually makes it impossible to assess their carbon emissions or the strength of their supply chain policies. So maybe the firm is in fact doing some good things. But without all that data and looking into it, it's not quite as clear. And so we actually rate the company with a rating of a severe ESG risk rating today, I imagine most of your clients would not have guessed that. The Morningstar Sustainability Rating then takes all those rating rolls them up to the company level and presents a strategy level rating. Today, we've rated more than 50,000 of those funds and one-third have a sustainability rating with Four or Five Globes. So things are headed in the right direction. But as we get more data, we'll be able to deepen the information we get to you. And next month, we're going to add 20,000 more funds with this rating. As the country risk rating gets added to our methodology. It will immediately provide ratings on many fixed income, allocation and alternative funds as well.

Number two on this list is seeking ESG opportunity. And I have to say this is my personal favourite, because it's the polar opposite of an avoidance strategy. Some people call this positive screening, and it emphasises companies that are positioned well in a more sustainable economy. Rather than simply focusing on tossing out those who fare poorly. There's a number of funds who already follow strategies like this Brown Advisory Sustainable Growth, Parnassus Core Equity come to mind. Or you can simply screen for funds within the Morningstar Low Carbon Designation in our software, and you'll find that there's more than 10% of all open-end ETFs, sorry, open-end funds and ETFs in our global database that have that designation.

The last one that I'll highlight is the least mature, but I think the most promising and it's assessing impact. This is really what your clients are asking you if I do X, what is its direct result. So this might mean for example, that in the fixed income world, considering what activities of bonds proceeds will actually finance and what the impact of that will be, and measuring it. We're working hard on routing our 2022 investments in Sustainalytics around creating a whole new data set around impact investing. And next year, when I stand in front of you, I hope to be able to talk to you directly about the fact that when you sit with a client, you will be able to actually show them the impact of the moves that they are making on their portfolios. And that they can offer both investing success and personal impact by working with you.

So the message here is pick what works for your client and your client's family. Embrace these six modern investing methods that are in our research that are in our software and find the opportunities to engage with these investors.

And finally, let me touch on the point of customization, my third point. You all know that the mainstream maturation of sustainable investing, and the preponderance of new technology is driving a new innovation that we're all hearing about and focused on, direct indexing, or even personalised indexing depending on what you want to call it. I like to joke that it's the Starbucks treatment for investors. And I think that it's the purest demonstration of the potential to put investors at the centre of the investing universe. In fact, Cerulli Associates is projecting that in the next decade, 10% of all advisor managed assets. So that's more than $5 trillion will be in these types of strategies outpacing even the growth of ETFs.

So you must be wondering, how does direct indexing benefit investors? First is the obvious bit about customising diversification. You could have a client in a well-balanced index fund, let's say one built on a Morningstar index. And perhaps it's our moat indexes, which also include our research. Direct indexing removes your handcuffs to customise that, because that portfolio today, for instance, might have a position in Intel, where your client already works. And so when she sits down with you, maybe you don't want to have Intel, both as a holding and in that portfolio. But if you look at our research, you can very quickly pull the button and replace it with AMD. Or you could simply say you don't want any more exposure to that particular company or its competitors or that sector. And very quickly pull the button on that as well. You can start to do this at scale.

And then there's taxes. We've been in an upward run in the market for two decades now. And many people are sitting on big gains in their equity investments. So the market volatility during the pandemic, obviously created a window that some of you took advantage of. But the reality is to get tax alpha. You need automated software that's actively looking to harvest losses and put them into other names, in a convenient, easy manner, and direct indexing will start to allow you to do that. Today's technological advances, and the drop in trade commissions means that all the extra knobs and dials and costs associated with them have basically disappeared. And so this makes direct indexing all the more appealing.

So we're bringing together all our capabilities across Morningstar to bring this to life. Our indexes are going to serve as a starting point for conversations with your clients. And you can have a broad one, a sustainable one, a research focused one, you name it, you can create it. Then you can layer in the customization that you want. Maybe it's our ESG data that you want to use. Or maybe it's some other screening that you want to do for optimization software an Advisor Workstation or Morningstar office. And then finally, our investment management group is using managed accounts to actually bring all of this to life, many of you are already using it for a number of things. And we hope to roll out this service in 2022.

Join my colleagues, Cindy Galiano, Bob Olsen, and Pete Dietrich, in their session tomorrow at 3 p.m. Central to hear about how we're going to bring this to life in 2022. I'm excited about it. Because the era of one size fits all portfolios is coming to an end, just like the idea of a one size fits all interaction with the client is likely going to come to an end. You can really customise your relationships. And our focus is going to be to partner with you in building portfolios with diverse objectives in mind that really meet your client's individual needs. I said it to you in the past. And I'm going to say to you again, when investors win, we all win. And I think we're at an inflection point where the tools and the technology and the data can enable investor success in a way that we simply have not seen up to this point. And they do it in a way where you don't have to give up the efficiency of running your practice and engaging with your clients. So lot of exciting stuff coming your way and a lot to get through in this conference.

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