Morningstar is getting ready to launch its own mutual funds for fee-based financial advisors.
In a recent amended filing with the Securities and Exchange Commission, Morningstar names the asset management companies that will serve as subadvisors for the nine funds that constitute the Morningstar Funds Trust, along with their individual portfolio managers and the expense ratios for each.
The firm, which first disclosed these plans last March along with an expected launch in the fourth quarter of 2017, now expects to introduce the funds in the third quarter, but it could give no assurances on timing, according to the SEC filing, which was first reported by Citywire. Morningstar is awaiting review and comment from the SEC before finalizing the registration statement.
The Morningstar Funds Trust includes nine actively managed funds that essentially replace the 15 to 25 third-party funds in Morningstar Managed Portfolios, which are offered exclusively to financial advisors. Although the funds are expected to change, “the underlying investment exposures — stocks, bonds and other securities — should be largely unchanged,” according to the SEC filing.
In the current incarnation, Managed Portfolios invest in third-party funds, which choose the funds’ securities, as well as individual stocks and ETFs. With the new launch, Morningstar will be more directly in charge of the mutual funds portion. Managed Portfolios will invest in Morningstar Funds, which will then invest in selected securities chosen by third-party managers.
The change is expected to simplify portfolio management due to the reduced number of funds and asset managers, reduce costs — about 20% on average — enhance tax efficiency and facilitate asset reallocation when necessary, according to the SEC filing.
In addition, it will provide access to skilled portfolio managers who don’t offer mutual funds, such as Levin Capital Strategies, a privately held hedge fund manager that doesn’t have mutual fund but is among the multiple managers selected for the U.S. Equity Fund within the Morningstar Funds Trust.
The changes will affect only the actively managed funds in the Managed Portfolios lineup, including the Mutual Fund and Active/Passive Asset Allocation, Retirement Income, Multi-Asset Income and Absolute Return Portfolios, which could have tax consequences. No changes are expected in the ETF Asset Allocation Portfolios or Select Equity Portfolios, which invests directly in stocks and other securities.
The SEC filing suggests that any tax consequences will be limited because about two-thirds of the assets in Managed Portfolios are currently in tax-exempt accounts. For those that aren’t, Morningstar says it “will make every effort to minimize the tax impact” of the changes.
The nine new funds in the Morningstar Funds Trust include three stock funds, four bond funds, a total return allocation fund that can invest in stocks and bonds, and an alternatives fund. All but two have multiple managers, and their expense ratios range from 52 to 129 basis points, initially. Morningstar will “waive all or a portion of its advisory fees and, if necessary, … assume certain other expenses” for at least one year, according to the SEC filing.
Here is a list of the nine funds, their subadvisors and expense caps, which are applicable for at least one year from the date of their individual prospectus:
Morningstar U.S. Equity Fund (MSTQX).
Expense Cap: 0.87% Subadvisors: ClearBridge Investment, Diamond Hill Capital Management, Levin Capital Strategies, MFS Investment Management, Wasatch Advisors, Westwood Management
Morningstar International Equity Fund (MSTFX)
- Expense Cap: 1.01%
- Subadvisors: Harding Loevner, Harris Associates, Lazard Asset Management, T. Rowe Price
Morningstar Global Income Fund (MSTGX)
- Expense Cap: 0.89%
- Subadvisor: Schafer Cullen Capital Management
Morningstar Total Return Bond Fund (MSTRX)
- Expense Cap: 0.55%
- Subadvisors: BlackRock Financial Management, Western Asset Management
Morningstar Municipal Bond Fund (MSTPX)
- Expense Cap: 0.63%
- Subadvisors: T. Rowe Price Associates, Wells Capital Management
Morningstar Defensive Bond Fund (MSTBX)
- Expense Cap: 0.51%
- Subadvisor: First Pacific Advisors
Morningstar Multisector Bond Fund (MSTMX)
- Expense Cap: 0.80%
- Subadvisors: Franklin Advisers, Loomis, Sayles & Co., TCW Investment Management
Morningstar Unconstrained Allocation Fund (MSTSX)
- Expense Cap: 1.00%
- Subadvisors: Brandywine Global Investment Management, Lazard Asset Management
Morningstar Alternatives Fund (MSTV)
- Expense Cap: 1.29%
- Subadvisors: SSI Investment Management, Water Island Capital