Within three years of starting its Indian operations, Morningstar has built a niche for itself with AMCs and wealth managers. Ravi Samalad catches up with Aditya Agarwal, Managing Director, Morningstar to explore more about Morningstar’s India plans
Morningstar started its Indian operations in 2008. How has been the journey so far?
The funds industry has been very receptive to us so far. We started rolling out our products in early 2009. We launched qualitative fund research in March 2010 which is analyst driven and forward looking, and now recently announced the launch of independent equity research in India. We also have ‘star ratings’ for funds which looks at historical performance on various time frames - 3, 5 and 10 years. Today we work with majority of fund companies, wealth managers and national level distributors.
What is the main source of revenue for Morningstar India?
Currently, our revenues come largely from institutions. Quite a few fund companies license our star ratings from us. We are advisors to PFRDA for over a year now, wherein we evaluate the performance of the pension fund managers in India and submit a quarterly report to the board of trustees of the New Pension Scheme Trust. We act as a research support function to a few wealth management companies to whom we provide our fund research, fact sheets and newsletters. We are contemplating getting into investment consulting in a bigger way. Globally we do a lot of investment consulting whereby we help AMCs and wealth management firms build asset allocation strategies and model portfolio.
Can you take us through the kind of products and services offered by Morningstar India to investors and AMCs?
We offer various products and services, ranging from a data feed to investment consulting. We have a research application called Morningstar Direct. Direct is a global research platform which provides users access to over 370,000 investment products we track globally. Normally, we don’t have any country specific version but in India we are providing an India specific version to our clients. The software provides access to all of our research reports, star ratings, and comprehensive data on Indian mutual funds. It has a lot of tools for any research analyst to use and enhance their research offerings. In India, AMCs and wealth management companies have subscribed to it. We have around 30 subscribers in India.
We also help a few institutions and banks in their research in India which is a part of our investment consulting business.
Are you developing any products for advisors?
Though globally we work with a large number of advisors numbering over 250,000 but we have not yet launched a product here for advisors. We are working on a product for advisors in India which would help them track portfolios and build a financial plan for their clients.
What is your methodology? How are your fund ratings different from the ratings offered by your peers? Which parameters are different? How much importance do you give to qualitative factors?
We have two types of ratings, one is a star rating which is based on past performance. Any fund which completes three years of track record, and has enough funds in the category to form a peer group is rated by us. Our start ratings are given on three time horizons – 3 yr, 5 yr and 10 years.
The other rating that we launched last year is the qualitative rating of funds. These ratings are analyst driven and are completely subjective or qualitative in nature. We look at 5Ps (People, Parent, Processes, Performance and Price). We are guided in this by a pan Asian-European rating committee. The committee reviews all ratings proposed by our analysts in India and then approves and assigns the same. This process helps us maintain the standards, quality and consistency of ratings across the globe. The criteria to evaluate a fund are homogenous across the globe. We usually pick funds which have a larger investor interest. We publish it on the website and fund companies license it if they see value in it.
How often do you revise star ratings?
Star ratings are revised every month. The qualitative ratings are either revised based on events or every six months whichever is earlier.
You currently don’t rate insurance products and ULIPs. Do you plan to star rating insurance schemes also?
We have started collecting data related to insurance products. There are currently 900 ULIPs funds in India. Once we collect all the data and assign them the categories, we will start rating them too.
Would you charge investors for accessing the contents of the website in the future?
Currently everything on the India site is free. In US and other markets we do have a payment subscription model for the premium version of the site. We want to get into subscription model but it’s too early for us right now.
How are your ratings different from your competitors?
In India all ratings are based on past performance. Our qualitative ratings look at not only past performance but also delve into other aspects which are important and help in decision making. Our process involves interaction with the fund managers, we give a lot of importance to the fund manager and his/her team, look at the pedigree of the fund company etc. No one looks at qualitative factors as comprehensively as Morningstar.
How many days does it take to complete the qualitative ratings?
It’s an exhaustive process. We have done 31 qualitative ratings so far. We have covered 45% of the assets in equity category. We want to extend the coverage to 70%. Once we are done with equity we will start covering fixed income funds.
Do you cover bad performing funds under you qualitative ratings as well and how do you avoid the conflict of interest if any rating is licensed out?
Yes, we do cover bad performing funds as well. We do not shy away from giving out negative ratings. At Morningstar, we always put the investors first. This is reflected in the manner we conduct our research as well. To ensure independence and objectivity, we do not seek mandates from fund companies for rating mutual funds neither can AMCs commission research from us. We don’t rate funds with the intention of licensing it out. Our research function is completely detached from the sales function. The analyst’s work is judged by the quality of research and not whether it is ultimately getting licensed or not.
The criterion to rate any fund is the level of investor interest. We want to cover all funds but have started with those funds where a lot of investors have invested.
Ratings are done based on the past performance of funds. How do you predict whether a fund’s future performance will continue to be good?
Even we can’t guarantee future performance but we endeavor to look at things which work in the long term. We don’t like AMCs which come up with NFOs very frequently. We look at the portfolio churn ratio. The five Ps that we use differentiates every AMC. If the AMC is focusing on long term then the likelihood of generating higher return over the long term is higher.
How should advisors and investors make good use of star ratings?
Ratings help advisors shortlist funds. A 5 star rating does not necessarily mean it’s a buy signal. Advisors should first build an asset allocation and then narrow down on funds. Use star ratings as a first level check but don’t blindly follow them.
