Morningstar Investment Conference: Keynote With Kunal Kapoor – Morningstar.com

Morningstar Investment Conference: Keynote With Kunal Kapoor Morningstar.comMorningstar Investment Conference: Keynote With Kunal Kapoor Morningstar.comMorningstar Investment Conference: Keynote With Kunal Kapoor Morningstar.com

Morningstar Investment Conference: Welcome! I wish you and your families safety and well-being. It’s been quite a ride since our last time together. Despite the circumstances, I believe that the past 19 months have shown me the best side to financial advice. It’s been proven true for me that creativity loves constraints. Research has repeatedly shown that constraints can be used to motivate and focus people to come up with new ideas. Nearly all of the ways we enable investor success together have been challenged. The pandemic, especially its duration, tested your relationships with clients. Yet, the client retention rates and asset retention rates we have seen show that your advice is highly valued. The pandemic did more than threaten people’s physical health. It also threatened their financial security. You also learned new ways to care for your clients. You did it all while you dealt with your own personal pandemics. Whether you’re here in person at the conference, or if you’re one of the many mask-wearing folks sitting behind me at Chicago’s McCormick Place I want to thank you for your perseverance. We are grateful for your willingness to learn, innovate, and grow with us. We are grateful for your efforts to bring out the best in investors. We will continue to face challenges and make choices that we didn’t anticipate when it comes to empowering investors in a post-pandemic era. We hope that our conference lineup will help to guide you through many of your questions. Let’s chat about the next three days. Today, Cathie Wood will be joined by Rob Arnott and Daniel Needham to discuss equity valuations. Megan Greene, an economist, will speak tomorrow about the economic impact of inequality. I will only say that it is clear that a wider range of people needs access to the markets and to your advice. Friday will see me and my friend, Sustainalytics founder Michael Jantzi, host a conversation with Jennifer Grancio CEO of headline-making hedge funds Engine No. 1. My credit and equity research colleagues will speak to us about long-term investing in these uncertain times. A great group of advisors will also share their experiences with adapting to better serve diverse audiences. We have sessions on everything, including accounting for disruption in a portfolio and cryptocurrency, as well as risks and opportunities in China and inflation. You’ll also hear from the Morningstar Awards for Investing Excellence’s winners this year: Fidelity’s Joel Tillinghast, Outstanding Portfolio Manager; Dodge & Cox, Exemplary Stewardship; Pimco’s Sonali Pier, for Rising Talent. Pimco has a knack for developing great people. Each of them deserves my personal congratulations for their leadership during the crisis. As I was reflecting back on the past year, I realized that there are many more avenues for people to invest today than ever before. Many of the barriers we used to consider as obstacles to investing are disappearing. We have frictionless trading, “zero”, fractional shares, expanding private capital securities access, digital asset trading and impact-focused securities. There is also democratized access and insight. Dog memes are now selling for millions. My son keeps asking me questions about crypto and SNAP stocks. I shake my head, but he is right. These new paths and new options have led to the conclusion that the face of the investor is changing and it’s giving you the opportunity to serve a wider audience. There are more Americans participating in the stock exchange, and Google searches for “learning to invest”, “what is investing” and “how do I start investing” have increased by 50% since January 2020. Morningstar.com has seen a 46% increase in visitors aged 18-24 over the past 12 month, and a 18% increase in visitors from women. This is a great opportunity to reach out to these investors, who may not have been reached previously. This shows that investors aged 35 and older are more interested in packaged investments. They also have high views for investments that pay dividends such as Vanguard Dividend Growth or Exxon Mobil. However, this stock doesn’t even crack 10 of the most visited for younger investors. Younger investors spend most of their time looking at stock pages and beginner content. GameStop ranked in the top 10 among 18-24-year-olds and 24-34-year olds. This gives you an opportunity to help these new investors with your great advice. I’ve said it before, and I’ll repeat it again: Millennials are here and they’re growing the dollars. Your typical client base is getting older and drawing down their retirement savings, making younger investors crucial to your future. Gen X and Gen Y now make up a third of the country’s wealth. The millennial share is increasing every quarter. They stand to inherit much the wealth you are looking after today. Today I’d like to discuss three ways you can connect this growing pool of investors to their portfolios. First, there are new opportunities to connect your client’s personal situation with the assets in their account. Second, try to have a conversation that removes the “ESG” jargon and replaces it with something meaningful. Finally, security selection can now be made as individual as your clients… and at scale. The first point is that investors of all ages want to see the entire picture, from their personal lives and preferences to the assets in the accounts. To earn their loyalty, you must show that you place each investor at the centre of investing. It’s impossible to beat the stickiness of knowing your client and showing how they have tailored their portfolio. Let’s talk about the line of sight that your clients want through the lense of risk. Who wants to discuss risk during a bull market. Morningstar does. Morningstar does. This fuzzy picture was created by investors and their advisors in March 2020, when things were at their worst. Some decided to reduce equity allocations and lock out clients from the stock market’s recovery. Over the past two decades, millions of investor questionnaires were taken in Morningstar Risk Profiler. It shows that the same investor’s willingness to take on risk for a better return is stable over time, despite market swings. Morningstar’s Risk Ecosystem, which was launched in advisor software this year, allows you to draw a straight line between individual investors as well as their investments. This allows the industry to move beyond a simplified bulk-banding of investors to create truly personalized comfort bands. It uses simple illustrations to match the Portfolio Risk Score. This measures a portfolio’s risk level compared to one our Target Allocation Indexes. Each investor’s Risk Comfort Range is also included. The days of a simple “suitability test” are gone. The government is waking up to this fact and catching up to where you are at the moment. Regulation Best Interest demonstrates that investors need to understand your process and show that it puts their interests first. Morningstar can provide you with data that reflects human nature and help you empower investors to succeed on an individual basis. At the Theater presentation, Sarah Newcomb and Paul Kaplan will discuss risk. The best part is that Advisor Workstation subscribers have access to all of this at no additional cost. Sustainability is an important aspect of how investing has changed. ESG. ESG. Exploring fund flows. Multiplying fund options. Shifts towards stakeholder capitalism A sustainability lens is essential to how people want to invest. It is going to be crucial to your success as well as the success of those you serve. Over the past 10 years, we’ve seen: ESG-intentional ETFs increase sixfold even as active ESG funds keep growing; a vibrant market of green bonds and sustainability-linked loans emerging; and ESG ratings are maturing amid a dizzying sea of choices bombarding investors. Last year, there were 6.5 times as many ESG stories in media than in 2018. The number of ESG stories in the media last year was already 6.5 times higher than 2018. We still have a lot of work to do. Financial firms have noticed: There isn’t a single fund firm without an ESG section. However, despite all the green landscapes, icebergs and windmills, there isn’t much out there to help investors understand it. We found that 77% of U.S. investors don’t know what “ESG” is or how to interpret it. However, 89% of them wanted to be more involved when we explained it to their without using industry jargon. This is where we all come together to help. Your great advice is the solution to all that noise every time. What can we do to help clients? Talk to clients about more than “ESG” when you speak with them. Explore the important data and material risks that sustainability brings to long-term investment. ESG provides invaluable insights for risk management for fiduciaries. For advisors of family members and children, it allows you to personalize portfolios closer/better than ever. Although investors may not be aware of or care about the term ESG, our research shows that they care about a secure retirement. They care about their financial goals. They are concerned about risk. They care about whether their children are suffering from asthma due to air pollution. They care about the fact that flood zones are changing, and how home insurers are limiting coverage. They care if their iPhone was created by a 14 year old working twice as many hours. They are concerned about the fact that produce is disappearing from their grocery shelves due to heatwaves or droughts. They care about Alexa’s daily routines and whether she passes it on to the bad guys. Many in the industry talk as if investors must choose between improving their investments or improving the world. Investment success and personal impact are not binary. It is no longer a zero-sum game. Morningstar calls “The New Sustainability” the agent of resolution. This is the new face to long-term investing. It shows investors that they can choose between them. Investors are choosing to invest in both. Our behavioral research team recently conducted an experiment where investors gave more money to hypothetical funds that had high diversity scores. Participants even penalized funds with missing diversity information–pointing to the value of disclosures in this space. We are here to help you find new investor frontiers that don’t appear on maps. Morningstar has been helping people find new ways to invest for decades. You should expect the same here. We are developing our research, ratings, software, and software to help you and your client choose the best path based on sustainable investing approaches. All backed by the data, research, and data that Sustainalytics has provided to sophisticated institutional investors for decades. Although there are many ways to achieve New Sustainability, they all typically take one of six approaches. Some are more concerned with avoiding negative outcomes, while others are more concerned with advancing positive outcomes. They don’t have to be mutually exclusive. Investors often combine them or any combination of them. I’ll be focusing on three of them today. While exclusions are a common practice, it is becoming more common to limit ESG risk. This refers to avoiding investments that have a high level of ESG risk. This approach is enabled by Sustainalytics ESG Risk Rating. It assesses a company’s exposure and management skills to specific ESG risks. If you’ve seen the documentaries about climate change and meat production, Beyond Meat and its plant-based substitutes for meat might seem like a safe ESG investment. Our ESG research reveals concerns about Beyond Meat’s packaging practices and farming practices. Beyond Meat’s inability to disclose ESG information makes it difficult to assess its carbon emissions and the strength of its supply-chain policies. Beyond Meat is not awarded any globes and is given a rating of Severe Environmental Risk. These company-level ratings are rolled up by the Morningstar Sustainability Rating. Today, a third of the approximately 50,000 funds that have a Sustainability Rating are equipped with 4 or 5 globes. Things are moving in the right direction. The number of funds that are eligible for this rating will increase by approximately 20,000 next month as we add the Country Risk Rating to the methodology. This will allow us to cover many fixed-income, allocation and alternative funds. My personal favorite is to search for ESG opportunities. This is the opposite of avoidance strategies. It’s when you use ESG assessments to identify businesses at the forefront of ESG. Sometimes it’s called “positive screening.” It focuses on companies that are well-positioned to succeed in a more sustainable economy and not those who will fail. Funds like Brown Advisory Sustainable Growth, (BIAWX), and Parnassus core equity (PRBLX) are examples. Or funds with the Morningstar Low Carbon Designation which account for just over 10% of all ETFs and open-end funds in our global database. Impact assessment is the last and most mature sustainable investing strategy I’ll mention. Investors are looking for ways to assess the impact of their portfolios. This could mean aligning their investments with U.N. This could include aligning their investments with the U.N. Sustainable Development Goals, or assessing the environmental and social performance of underlying investments. It is the process of determining what activities a bond’s proceeds can finance in fixed-income markets. We believe there is a huge opportunity to help investors in this area. Investors have the intention, but they need clarity on data and measurement. This is where you can expect to see more from us. No matter what combination they are, each approach offers investors a way to create their own path to sustainable investment. They can both help you achieve financial success and make a positive impact on your life. Choose what is best for your client and their family. These six modern investment methods are how you can help investors select the best. Let’s look at customization as the last opportunity to engage more investors. Direct indexing, or personal indexing, is one of the key factors behind sustainable investing’s mainstream maturation. It’s the Starbucks treatment for investors. It might be the best example of how investors can be at the center in investing. Cerulli Associates projects that the U.S. direct-index strategies will reach almost $5 trillion within the next ten years, or 8% of advisor managed assets. This is more than the growth of ETFs. How does direct indexing help investors? Consider custom diversification first. Direct indexing removes your handcuffs. Let’s suppose your client works at Intel and has a large stock position. You could then put a balanced, well-constructed ETF in your client’s portfolio (say, one based on our moat research). This would make Intel more visible and give you more exposure than your client needs. Direct indexing removes your handcuffs. Morningstar equity research tools can help you determine if AMD is a solid stock or a similar chip manufacturer. Now you can replace Intel by AMD, giving your investor a better, more diverse position. The same idea could be applied based on the unique values of a client, such as the desire to advance gender equality or to avoid supporting deforestation. Consider taxes. Many people could be enjoying significant gains in equity investments, as we’ve been experiencing an upward market trend for the past decade. Advisors can use market volatility to offset embedded gains. Direct indexing allows advisors to sell client stock at losses in order to offset gains in other stocks, or create “tax alpha”. You might think that multi-asset and target-date funds provide the simplicity investors desire. Direct indexing may seem too complicated. Direct indexing is no longer complicated thanks to technological advancements and the dropping of trade commissions. Morningstar has made significant investments in this area to help you offer direct indexing to clients. To help investors put their personal needs at the heart of their portfolios, we have brought together all our resources. You can use our indexes as your starting point, whether it’s a broad market or sustainable index. You can then layer in ESG data from Sustainalytics either as a standalone data feed or within our portfolio optimization software, Advisor Workstation and Office. Lastly, Morningstar Investment Management’s managed accounts provide a full range of investment options for your clients. We do it all with independent, trusted advice. Come join Cindy Galliano, Bob Olson and Pete Dietrich tomorrow afternoon for a session to learn more about the current state of affairs and what’s in store for 2022. The days of one-size fits all portfolios are over. Morningstar can be your partner in building portfolios that meet diverse objectives. Morningstar is available to help you with models, direct indexing, and other options. This is how we meet the expectations of modern investors and it’s our chance to continue showing the best side financial advice. We all win when investors win, as I always remind you. Let’s now talk about the real stars of this year’s conference: my colleagues Leslie Marshall, Sarah Bush, and their emcees. Enjoy the conference, and don’t forget to take it all!

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