July 9, 2021

We know that passive managers are some of your biggest clients, but help us understand how the shift from active to passive management impacts revenue at Morningstar Data and Direct? How much do passive managers pay for your services on average when compared to similar AUM active managers?
a. For example, on an apples to apples basis, when an active manager terminates you while a passive manager hires you, what is the net revenue impact to Morningstar in the majority of cases?

It is important to consider three factors when understanding the impact that the rise of passive investing has on Morningstar’s overall business. First, while we agree that passive management is a clear source of growth in the market, our data suggests that assets under active management are not in decline despite the headlines. Citing our own data, you’ll see that assets under active management in the U.S. ended 2020 at $13.7 trillion, representing a compound annual growth rate of 7.3% over the past five years. This compares against almost $10 trillion of passively-managed AUM, which grew at a CAGR of 18.9% over the same time period. While passive AUM indeed grew faster than active AUM over this time, we continue to believe that as long as actively-managed assets continue to show growth, active managers will continue to rely on our services.

Second, asset managers represent a more substantial portion of the client mix for Morningstar Direct than Morningstar Data, with the latter’s mix skewed more toward broker/dealers and wealth managers. Asset managers use Morningstar Direct for marketing, proposal generation, and competitive analysis – workflows that all remain relevant and critical, particularly given the competitive dynamics that exist between active and passive.

Third, our clients include many of the world’s largest asset managers, many of whom have both active and passive products. As such, it is difficult to make an X:Y comparison on a comparable dollar basis for you since the growth in AUM of passive products does not represent a perfect negative correlation with revenue on the active management side. A representative case in point would be an active manager client that decides to launch an ETF. Such a client would likely retain its Morningstar Direct licenses for the actively-managed side of the business, but may also choose to add new seats to its license for employees managing the passive side of the business.

Over the past five years, Morningstar Data’s revenue CAGR was 8.3% and Morningstar Direct’s revenue CAGR was 9.2%. As such, both of these products have shown -and continue to show- healthy rates of revenue growth even amidst the rise of passive investing. If anything, we suspect that the rise of automation across the financial services industry has a greater impact on platform seat growth than passive investing; however, even if clients reduce seats of Direct due to automating parts of their business, we often pick up business from the same client through Morningstar Data by offering them data licenses or redistribution rights. Nevertheless, Morningstar Direct also continues to demonstrate growth in user seats.

Whether active or passive, we believe that our data and IP help clients evaluate the merits of managed investments in consistent and meaningful ways across strategies. Even though ETFs are used more frequently in portfolio construction these days, those portfolios still need to be analyzed.

Moreover, we’ve added solutions across our product offerings that specifically meet the needs of passive investors, such as Morningstar Indexes, which has shown healthy levels of growth, as well as private equity and ESG data and analytics. We are here to serve our clients’ needs no matter what method of investing is in favor.

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