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Morningstar Boosts Model Portfolio Research

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What You Need to Know

  • The number of model portfolios reported to Morningstar has more than doubled since 2020.
  • Growing demand for model portfolios is being driven by the greater flexibility and customization they offer, particularly regarding tax management.
  • The company will roll out the Morningstar Rating — or star rating — to model portfolios in the fourth quarter.

Morningstar announced this week that it is bolstering its model portfolio research as interest in the products continues to grow.

The firm has just published its annual report on the model portfolio landscape, which says the number of options for investors is growing rapidly. Demand is being driven by the greater flexibility and customization that models offer, particularly when it comes to tax management. 

Besides publishing the paper, Morningstar said it is doubling the qualitative and forward-looking Analyst Rating coverage of model portfolios by the end of 2021. Morningstar’s manager research team currently covers 43 model portfolio series to provide ratings on more than 250 models, spanning 24 asset managers. 

Model portfolio analyst ratings are available on Morningstar Direct, the company’s flagship investment research platform for asset and wealth managers, as well as in Morningstar Advisor Workstation and Morningstar Office. 

In addition, the company will roll out the Morningstar Rating — or star rating — to model portfolios in the fourth quarter.

The star rating for model portfolios will follow the same core methodology that is used to assign ratings to managed investments such as mutual funds and separate accounts. Under this methodology, Morningstar will assign ratings to model portfolios based on their past risk-adjusted returns versus their category peers.  

Morningstar said that given that model portfolios are hypothetical, it is adapting the core star rating methodology to ensure that the star rating for model portfolios upholds a high standard of reliability. Specifically, it will adapt the star rating methodology in these ways: 

  • Strictly limiting the use of back-tested return data in the risk-adjusted return calculation.  
  • Requiring model providers to submit portfolio holdings data on a quarterly basis.  
  • Requiring model providers to comply with Global Investment Performance Standards or manage at least $10 billion in regulated investment vehicles such as mutual funds.  

As part of its transparency push, Morningstar will surface new data points that provide foundational information on model portfolios across its product suite. This will include assets under advisement, asset allocation targets and ranges, and rebalancing frequency. 

Finally, the company will launch a new “Model Exchange” functionality to Morningstar Advisor Workstation subscribers, which will enable them to research, compare, apply and subscribe to some 2,100 models. 

All models will be assigned the new Morningstar Portfolio Risk Score, which measures a portfolio’s level of risk. Enterprise clients of Advisor Workstation can also manage their own proprietary models alongside any third-party models, simplifying the planning-to-action process for their advisors. 

“Morningstar is doing what it did for mutual funds and exchange-traded funds: helping investors and advisors make sense of a plethora of new investment options with the tools and insights to assess whether that investment option is right for them or their clients,” Michael Herbst, director of models and institutional investments for Morningstar, said in a statement. 

Herbst said that as investors demand more personalization, Morningstar is putting independent research and data in their hands and equipping financial professionals with the means to advise and empower their clients.

New Research

The just-published second edition of its Model Portfolio Landscape defines “models” as portfolio blueprints that asset managers or investment strategists offer to financial advisors, who implement them in a variety of ways, such as following paper versions of the model or using third-party platforms to handle the execution. 

Not included are models that large wealth management firms offer exclusively through their advisors and turnkey asset-management programs because they typically are not public. It also excludes robo-advisors that mostly target retail investors, not financial advisors.

The paper notes that some $315 billion in assets were following model portfolios as of June 30, an estimate it said is conservative as it is based on data submitted by 28 model providers and counts only what providers can accurately track.

The 10 largest providers have around 75% of overall market share. BlackRock is the biggest one, with almost $70 billion in assets. 

According to the paper, the number of model portfolios asset managers and third-party strategists report to Morningstar has more than doubled since 2020 to some 2,100 models. The surge continues. Morningstar has collected data on more than 1,000 new models in less than a year with only a modest increase in outreach. 

Allocation models still make up the bulk of options. As of August, three-quarters of individual models reported to Morningstar fall into one of seven allocation categories. 

The paper said model portfolios continue to offer a large fee advantage compared with similar mutual funds, driven by the greater use of low-cost exchange-traded funds as underlying components. 

And they offer significant flexibility to those looking to manage tax liabilities. That has supported the launch of more than 250 tax-aware allocation strategies, which are largely nonexistent in mutual funds, and opened the door to model-delivered active equity strategies.

“Our manager research team is doubling down on model portfolios research to provide reliable, useful analysis of model portfolios so investors can make informed investment decisions,” Jason Kephart, strategist for Morningstar’s multi-asset and alternative strategies research group and a co-author of the report, said in the statement. 

“While the model portfolio industry is still in early innings, we are seeing increased flexibility for investors to manage tax liabilities through the use of tax-oriented strategies, and innovation with the rise of model-delivered equity strategies.” 


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