Morningstar has agreed to acquire Moorgate Benchmarks, a privately held indexing specialist based in Europe, in a move that aims to enhance the investment research firm’s direct indexing capabilities.
Morningstar is aiming to be a significant player in the burgeoning direct indexing industry.
Direct indexing allows investors to build bespoke portfolios that are similar to index-like solutions but tailored to their personal preferences.
The primary objective is beta exposure; however, portfolio customization aims to improve outcomes by leveraging tax-loss harvesting, accounting for ESG considerations, or establishing factor and thematic tilts.
Current direct indexing solutions are typically offered through separately managed accounts (SMAs).
Direct indexing benefits, along with fintech advances that are helping to bring these solutions to a wider audience of investors, has led financial research firm Cerulli to estimate that the industry will exhibit a compound annual growth rate over the next five years of 12.4%, higher than the 11.3% estimated for ETFs and 3.3% estimated for mutual funds. Direct index SMAs totaled $362 billion in assets at the end of 2020.
Due to this growth opportunity, several large asset managers have already sought to gain a foothold in the burgeoning industry through M&A activity.
According to Cerulli data, Morgan Stanley’s Parametric Portfolio Associates is currently the top provider of direct index SMAs, accounting for approximately one-third of the industry’s AUM, as of the end of Q1 2021. Morgan Stanley acquired Parametric last year as part of its larger acquisition of Eaton Vance.
Other big players already in the industry include several well-known ETF providers such as BlackRock (whose acquisition of Aperio established the asset management giant as the second-largest provider of direct index SMAs), Fidelity Investments, Columbia Threadneedle, Natixis Investment Managers, JP Morgan, and Vanguard.
The acquisition of Moorgate Benchmarks indicates that Morningstar is also aiming to be a significant player in the direct indexing industry. The firm writes that “pairing Moorgate Benchmarks’ advanced index design, calculation, and administration technology and processes with Morningstar’s data, research, and unique Morningstar-led index intellectual property will give investors more customized and personalized indexes, delivered faster.”
Ron Bundy, President of Morningstar Indexes, added: “The index industry today needs disruption, with a number of entrenched players who aren’t providing enough value and innovation to investors for the fees they charge. Moorgate Benchmarks’ advanced technology, index calculation process, and strong reputation in Europe will help us address this issue head-on. The capabilities that Moorgate Benchmarks bring will help accelerate our goal of becoming a leading global index provider by providing more value to the end investor.”
With this transaction, Moorgate Benchmarks becomes a wholly owned subsidiary of Morningstar. The firm’s executive team, 20-strong employee base, technology, and intellectual property will all transition to Morningstar. Tobias Sproehnle, CEO of Moorgate Benchmarks will become Head of Morningstar Indexes in Europe.
“It’s exciting to be joining forces with Morningstar, a firm which brings incredible access to data, enormous global market insights, and a strong reputation for doing right by investors,” said Sproehnle. “We have already built a strong rapport and respect for the Morningstar Indexes team in our work together over the past year, and I am personally excited to play a larger role in fuelling innovation in the industry to benefit our clients and the broader investment community.”
The financial terms of the deal were not released.