Track Record

UBS Asset Management Licenses Morningstar Indexes

Track Record

Long known as a sideline mutual fund tracker and commentator, Morningstar is set to enter the industry as an active participant in the role of index licensor. UBS Global Asset Management said today that it will be the first fund company to license at least some of Morningstar's 16 proprietary equity indexes as the basis for exchange-traded funds (ETFs).

"UBS has licensed Morningstar indexes for both the U.S. and Europe," said Joseph LaCorte, managing director for UBS Global Asset Management. "Which products and the timing will be decided based upon identification of specific demand."

The Morningstar indexes are comprised of a U.S. total market index, several broad benchmarks broken down by style and market capitalizations, and 9 indexes covering each style box.

"In building the indexes, we wanted to combine the ways we think people should pick, build, and monitor portfolios," said Morningstar managing director Don Phillips. "Most investors just pick a hot-performing fund and don't really think about how it fits in with the rest of their portfolio. They don't look at the big picture."

Phillips said he believes there is room for Morningstar's new benchmarks in an already crowded index business and growing ETF market.

"Existing indices really were constructed independent of stock and fund research," said Phillips. "When we first developed our style boxes we looked at only two valuation factors: p/b and p/e, which was reasonable ten or fifteen years ago. Later we realized the system wasn't perfect, because fund managers aren't just looking backwards. Now the style box methodology also includes some forward-looking growth criteria."

Liquidity is a major concern for intraday-traded ETFs, and Phillips said the fact that Morningstar's indexes are float-weighted should help. In float-adjusted benchmarks, a company's weight in an index is determined by the number of shares actually available for purchase on the open market, an approach that cuts down on liquidity crunches.

"In most cases I anticipate the ETFs will be full replications of the index, and definitely for the large-cap benchmarks," said Phillips.

"The Morningstar indexes have been designed to be compliant with both the Registered Investment Company (RIC) and UCITS [European equivalent] concentration limits. In addition, underlying equity liquidity is a major consideration in determining the universe of securities that make up the indexes," said LaCorte of UBS.

UBS Global Asset Management currently offers six exchange-traded funds that trade on the Swiss Exchange under the "Fresco" brand name. These funds cover the broad European, UK, and Japanese economies. UBS also has ETFs hitched to the Dow Jones Industrial Average as well as U.S. large-cap and technology benchmarks from Dow Jones.