Morningstar’s plan to roll out their own family of mutual funds, for use with their managed portfolio service, is becoming more concrete. In an April 23, 2018 filing with the SEC, Morningstar notes that they’re in “the quiet period” required by the SEC; nonetheless their filing says a lot.
Morningstar will offer nine funds to their Morningstar Managed Portfolio clients. That’s a booming niche for them:
… for the full year ended Dec. 31, 2017 … Assets under management and advisement in Managed Portfolios increased 31.8% to $39.8 billion. (Morningstar, Inc. Reports Fourth-Quarter, Full-Year 2017 Financial Results, 2/20/2018)
In each case, Morningstar will select the manager or managers responsible for selecting the fund’s securities: “the portfolios will invest in Morningstar Funds which, in turn, will invest their assets in individual stocks, bonds, and other securities that have been selected by third-party managers.”
The managers for the new funds are listed separately in the new prospectus. We originally reported that the manager names were not public. We were wrong and we regret it. Thanks to Sarah Wirth, who handles media relations with Morningstar, for helping straighten that out. Here’s the short roster with just the names of the advisory firms.
| US Equity | ClearBridge Diamond Hill Levin Capital Strategies MFS Wasatch Advisors Westwood |
| International Equity | Harding Loevner Harris Associates Lazard T. Rowe Price |
| Global Income | Schafer Cullen Capital Management |
| Total Return Bond | BlackRock Western Asset Management |
| Municipal Bond | T. Rowe Price Wells Capital Management |
| Defensive Bond | FPA |
| Multisector Bond | Franklin Advisers Loomis Sayles TCW |
| Unconstrained Allocation | Brandywine Lazard |
| Alternatives | SSI Water Island |
We also know that some of the current managers will not be investing on Morningstar’s behalf in the future.
Some of the managers whose mutual funds are currently used in your managed portfolios were not named as subadvisers to Morningstar Funds. Why?
Although the trust will provide a discussion of the factors the trustees considered in approving the subadvisers in a future shareholder report, we won’t otherwise comment on why we selected or rejected individual managers.
One possibility is that Morningstar saw virtue in streamlining the management structure, another is that some of the managers declined the opportunity to take a pay cut (Morningstar estimates they’ll be able to lower fund expenses by 20% using the new funds, presumably some of that attributable to lower management fees) to continuing working on Morningstar’s behalf, but that’s not documented.
The most curious question and answer in their FAQ involves their decision not to make their funds available to the public.
Why aren’t you making Morningstar Funds available directly to the investing public?
Our focus is on delivering cost savings to clients in our Morningstar Managed Portfolios. The impetus for launching the Morningstar Funds is to lower the overall fees that these clients pay. Thus, the funds are intended to be used exclusively in the portfolios we offer these clients, not as standalone offerings. We don’t currently have plans to make the funds available to the general investing public.
The answer feels, at the very least, incomplete. If the goal is “delivering cost savings” to their current investors, they could achieve the goal more easily by including more (outside) investors. Other possible, though unconfirmed, explanations might be (1) they don’t want to directly challenge Vanguard, T. Rowe Price and others who themselves support Morningstar and (2) they might anticipate problems attracting top-tier “third party managers” if the Morningstar products threaten to cannibalize those managers’ business.
The comparable question about offering Morningstar Funds to non-U.S. investors adds in interesting gloss.
Does Morningstar Investment Management plan to offer Morningstar Funds to investors outside the U.S.?
We don’t currently have plans to do so but are continuously evaluating ways we can bring low-cost options to our managed portfolios globally. Morningstar Investment Management Australia already offers multimanager funds.
Most of the Morningstar Australia retail funds seem to be objective-focused (Morningstar High Growth) and high-performing (High Growth is five stars in each measurement period), though it’s impossible to make a confident assessment of the fund without understanding its competition.
Bottom Line: I hope the Morningstar funds do brilliantly well. They represent an interesting experiment and the financial security of a lot of people rest on them. They seem thoughtfully designed and their emphasis on cost minimization likely serves their investors’ interests. Nonetheless, the “sleeves for star managers” strategy is hard, as illustrated by the manager turnover at, and occasional liquidations of, the Litman Gregory Masters funds. The “masters” at their Smaller Companies fund, for instance, tend to fall from favor pretty quickly; the fund has had 20 masters since launch in 2003, with some teams out within three years.
