Newsmaker: Empowering investors

Morningstar, which held a 40% stake in Sustainalytics since 2017, agreed to take full control of the research provider in a deal that values the firm at €170 million.

In 2016, the two firms teamed up to launch sustainability ratings for more than 20,000 investment funds around the world. The ratings use globe icons to show a fund’s ESG score: funds with a one-globe rating have a low score; funds with a five-globe rating, a high score.

It’s an intuitive system that’s easy to understand at a glance — and that’s exactly what Morningstar was going for, Kapoor says.

“While ESG as a concept is very accessible, when you start to look at the actual ESG data, it can be pretty all-consuming,” Kapoor says. “Our goal here is to make ESG more accessible and meaningful.”

Kapoor notes there’s a “ton of data” underlying the “globes” in Morningstar’s sustainability ratings. He says his firm has always tried to take “financially complicated” data and present it in a format that “people can relate to more easily.”

Retail investors certainly seem able to relate to ESG as a concept. The Responsible Investment Association’s 2019 Investor Opinion Survey found that 72% of survey participants in Canada expressed an interest in responsible investing (RI), up from 60% in 2018.

So far, that interest hasn’t led to retail investors putting their money where their mouth is — at least, not for RI funds. According to the Investment Funds Institute of Canada’s 2019 Investment Funds Report, RI assets under management in Canadian-listed funds account for less than 1% of the assets invested in either mutual funds or ETFs.

Still, Kapoor says, a sea change is coming. He notes that ESG is one of the “brighter spots” for many asset managers today. And the latest data are encouraging: Morningstar analyzed the performance of 206 RI funds in the first quarter of 2020 and found that 70% outperformed their peers during market turmoil.

While Kapoor worries about performance-chasing in the ESG space — obsessing over outperformance, he says, is “not truly long-term thinking about how to apply ESG” — he acknowledges that the recent success of RI funds may appeal to ESG skeptics. ESG, Kapoor notes, is sometimes “very politicized” and seen by its detractors as the domain of environmental and social activists. But ESG is “so much deeper than that,” Kapoor says.

“If you look to the future, is it likely that the world is going to make a transition to being lower–carbon in nature?” Kapoor asks. “I think that’s not an unreasonable position. The beautiful thing about ESG is that you can build a portfolio that reflects that view and includes companies across all sectors — including the oilpatch, for example — that are poised to do better in a world of low carbon.”

Kapoor adds that financial advisors can use conversations about ESG to build strong relationships with clients: “ESG is a way to really engage with them and help them personalize their portfolio.”

Sustainalytics isn’t the only firm Morningstar acquired recently. In May 2019, Morningstar announced it was acquiring Toronto-based debt rating agency DBRS Ltd. for US$669 million. The deal closed in July 2019 and DBRS was integrated with Morningstar Credit Ratings LLC.

More recently, Morningstar set its sights on the financial planning space. The company acquired AdviserLogic Group, based in Australia, in December 2019, and announced the acquisition of Toronto-based PlanPlus Global Inc. in March of this year. (No terms were disclosed for either deal.) Both acquired firms provide financial planning and risk-profiling software.

“When each of these deals closed, every employee from those companies joined Morningstar,” Kapoor says. The AdviserLogic team has grown by approximately 40% since that company was acquired and now is recruiting more staff. Morningstar’s Canadian team has grown by 175% following the acquisitions of DBRS and PlanPlus Global.

Kapoor is quick to reaffirm that Morningstar is, at its core, a research and data provider, but says financial planning is something the firm has always focused on, in both its research and software offerings.

“What we’re trying to do is more meaningfully link the investment planning process to the financial planning process,” Kapoor says. “What we see in the marketplace today is that firms either do investment planning or they do financial planning, and they’re not successfully linking these two things together.”

Successfully integrating the two services is a great way for advisors to demonstrate their value to clients, Kapoor says. And lately there’s been no shortage of opportunities for advisors to prove their worth as clients fret over plummeting portfolios in the wake of the market crash spawned by Covid-19.

“Times like these are great for showing your value,” Kapoor says. “Advisors who stick to a consistent, thoughtful approach will come through shining.”

The Covid-19 pandemic brought the global economy to its knees while businesses around the world scrambled to adapt. Working from home is now the norm for office workers throughout North America. But Morningstar had a trial run at the new norm with its office in China months before remote work became a necessity in Chicago.

“We have about 1,000 people in Shenzhen, China. We had transitioned them to remote work prior to a lot of the rest of the globe,” Kapoor says. “Ironically, today, we’re mostly working at home, except in China, where we’re back in the office.”

The transition to working from home was “relatively smooth” for Morningstar, Kapoor says. The firm invested in remote-work technology — such as a corporate Zoom account — before the pandemic struck. Morningstar didn’t take long to “settle into a rhythm” of remote work.

And Kapoor also has settled into a rhythm. Some parts of his day haven’t changed — he still gets up at 4:30 a.m. each weekday to go for an hour-long run before getting down to business. (“I could easily push that back,” he says, “but then I wouldn’t feel like I’m in a workday.”) He still pores over companies’ annual reports, which are piled on the floor of his home office.

But other parts of Kapoor’s days have changed, and for the better. He no longer travels constantly — something that’s left him feeling healthier and freed up more time to spend with his wife and three kids.

For example, Kapoor used some of his newfound family time to watch The Last Dance with his eldest son. The ESPN series chronicles both of Michael Jordan’s back-to-back-to-back championship runs with the Chicago Bulls.

“I started at Morningstar right around the time of the [Bulls’] second [championship] run, so I have very fond memories of that time,” Kapoor says. “My eldest is 14, so he’s at the point where he’s into this. It’s been really fun to watch it with him — although I cringe at the amount of swearing that’s in the show.”

The Bulls’ last championship came in 1998 — a year after Kapoor began his career at Morningstar as a data analyst. He’s seen a lot of changes at the firm over the past two decades, but says Morningstar’s mission has always been the same.

“Morningstar is changing because the modern financial advisor and the modern investor are different,” Kapoor says. “But what’s not changed is [Morningstar’s] mission. We’re all about empowering investor success.”