Morningstar to Launch Model Portfolio Star Ratings in Q4

Morningstar has announced a set of new initiatives aimed at bringing additional transparency and performance analysis to the model portfolio investment market.

The firm says it is pursuing this goal as model portfolios continue to gain popularity among investors. Citing its existing reporting on the model portfolio landscape, Morningstar says the number of options for investors is rapidly growing, with demand being driven by the potentially greater flexibility and customization that models offer, particularly when it comes to tax management.

One particular initiative Morningstar is undertaking in this area is the anticipated fourth quarter launch of its popular Morningstar Star Ratings within the model portfolio space. The firm is also aiming to double the qualitative and forward-looking Morningstar Analyst Rating coverage of model portfolios by the end of 2021.

Morningstar says it is assigning the star rating to model portfolios to help investors better sift through the large and growing universe of model portfolios. The star rating for model portfolios will follow the same core methodology that is used to assign ratings to managed investments in other universes 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. Given that model portfolios are hypothetical in nature, Morningstar is adapting the core star rating methodology to ensure the star rating for model portfolios upholds a high standard for reliability.

Another new goal is to “surface new data points that provide foundational information on model portfolios, such as assets under advisement [AUA], asset allocation targets and ranges, and rebalancing frequency,” according to the firm’s announcement.  

To this end, Morningstar has also published a new in-depth analysis of the model portfolio landscape. The analysis suggests a “conservative estimate” of $315 billion in assets currently follow model portfolios, based on data submitted to Morningstar by 28 model providers. In reality, the analysis suggests, the figure is potentially substantially higher, as many model providers cannot accurately track assets following their paper models or those invested through model marketplaces. As of the end of June, BlackRock is the largest provider, with almost $70 billion of assets, while the 10 largest providers have around 75% of the overall market share.

The analysis shows the number of models available continues to surge, as Morningstar collected data on more than 1,000 new models in less than a year, with only a modest increase in outreach, which the firm says suggests that they’re growing fast.

Beyond the research effort, Morningstar is also launching a new “Model Exchange” functionality for Morningstar Advisor Workstation subscribers, enabling them to research, compare, apply and subscribe to approximately 2,100 models.

Michael Herbst, director of models and institutional investments for Morningstar, says the firm intends to bring similar levels of transparency to model portfolios as is available for mutual funds and exchange-traded funds (ETFs).

“Models is a space our own Morningstar Investment Management group knows well from their years of making them available to advisers, and as investors demand more personalization, Morningstar is answering the call by putting independent research and data in investors’ hands and equipping financial professionals with the means to advise and empower their clients,” Herbst says.