On July 11, 2018, the SEC declared effective the registration statement of Morningstar Funds Trust for a series of nine open-end mutual funds. These Morningstar Funds will be offered exclusively to fee-based advisors that use Morningstar Managed Portfolios and will not be available for direct investment by retail investors. Please reference our July 12 press release for more information.

In our view, the most important rationale for pursuing this strategy is our expectation that it will improve investor outcomes in two ways. First, replacing third-party, actively-managed mutual funds removes a layer of costs embedded in the fee structure of Morningstar Managed Portfolios. In some cases, the funds will still be sub-advised by the same managers we use in our multi-asset strategies; however, this structure allows us to offer Morningstar Managed Portfolios to clients at more attractive price points. Secondly, we believe that this structure makes it easier for Morningstar’s Investment Management team to express their own investment views. While sub-advisors will be responsible for picking individual securities according to the fund’s mandate, Morningstar Investment Management will leverage its expertise in asset allocation by making portfolio adjustments when needed. Consistent with our mission of creating great products that help investors reach their financial goals, we’re excited about our enhanced ability to offer a wide-range of strategies, backed by Morningstar’s research and goals-based investment expertise, at reasonable price points.

So far, clients that use our mutual fund portfolios have been enthusiastic about our ability to reduce the program fee on our turnkey asset management program and eliminate our strategist fee when we act as a model provider on third-party platforms.

We greatly value and protect our hard-earned reputation for research independence. Our mutual fund investment research is produced by our Manager Research Group. This group is separate from Morningstar Investment Management most notably in terms of personnel and reporting structure. Morningstar Investment Management has the same access to our manager research analysts and investment research as any client of our Manager Research Group. Additionally, our Manager Research Group will not do any qualitative assessment (e.g., assign an Analyst Rating – Gold, Silver, Bronze, etc.) or produce written analysis on the Morningstar Funds. However, after three years of performance history, the funds will be eligible for the quantitatively-driven Morningstar Rating™, or star rating, which will measure each Morningstar Fund’s trailing risk-adjusted returns relative to category peers. Given the separation of the groups and our policy of not producing qualitative assessments or analysis on the Morningstar Funds, we do not believe that there exists a conflict of interest that might compromise our Manager Research Group’s independence and the integrity of its investment research.