Morningstar Conference Spotlights Investment Trends, AI Advancements

Expert Insights On Index-Based Investing, U.S. Versus International Equities, Private Markets, Interval Funds, Leveraged Loans And How AI Will Change Wealth Management
Morningstar’s AI avatar, Mo, wears a shirt honoring the firm’s 40th year.
Morningstar’s AI avatar, Mo, wears a shirt honoring the firm’s 40th year.
Chris Latham, Managing Editor, Wealth Solutions Report
Chris Latham, Managing Editor, Wealth Solutions Report

The Morningstar Investment Conference, held from June 26 to June 27 at Navy Pier in Chicago, featured four keynote speeches from industry leaders, dozens of panel sessions geared toward financial advisors and portfolio managers, as well as an exhibitor hall filled with fintech and asset management vendors.

Here are highlights from the 36th annual conference, including insights from onsite experts who spoke with WSR about their focus areas.

Keynote Speeches

The Navy Pier Ferris Wheel displayed the logo for the Morningstar Investment Conference.
The Navy Pier Ferris Wheel displayed the logo for the Morningstar Investment Conference.

Savita Subramanian, Managing Director, Head of U.S. Equity and U.S. Quantitative Strategy at Bank of America Merrill Lynch, kicked off the event with a keynote that offered a contrarian approach in support of U.S. large cap value holdings amid the current “goldilocks” environment.

Zack Kass, the former Head of GTM at OpenAI, gave a keynote about artificial intelligence and its trajectory; how industries are using it to improve efficiency, reduce employee burnout and reshape work processes; and how financial organizations can leverage AI for the social good.

Michael Kitces, Chief Financial Planning Nerd of Kitces.com, delivered a keynote about how financial planners should adapt to the rise of robo-advisors, better explain to clients how each human advisor differentiates themselves from their peers, and develop practice specializations.

Ian Bremmer, President and Founder of Eurasia Group and GZERO Media, spoke in his keynote about how advisors can prepare for unforeseen geopolitical threats, manage emerging markets risk, and capitalize on opportunities in a rapidly changing global landscape.

From AI To AGI

Zack Kass, Former Head of GTM, OpenAI
Zack Kass, Former Head of GTM, OpenAI

Kass also conducted a Q&A session with the press about his views on the potential socioeconomic impact of artificial general intelligence (AGI), in which computer programs would resemble or surpass human-like intelligence. While the rise of AGI likely will eliminate some jobs for people, it will make other people’s jobs less tedious and create entirely new jobs that have yet to be imagined.

He also predicted that, in the nearer term, the AI technology that currently exists would continue to increase in accuracy and capabilities as the competitive landscape intensifies, which in turn will lead to apps that allow users to select from an assortment of AI programs and choose the best one for the particular query.

“Today, wealth management is still a luxury,” Kass said. “What we want to start to observe is the power of AI to deflate the cost of services that we treat as luxuries today that should actually be staples. Financial literacy is obviously a critical one. It’s something that would make the world a much better place.”

Morningstar itself has developed an Intelligence Engine that enables users to build their own generative AI apps without the need for extensive coding. Intelligence Engine allows users to upload their own data sets, write their own prompts and test their new apps before officially deploying them. One example of a use case is to build a proprietary chatbot.

Indexes And More

Dan Lefkovitz, Strategist, Morningstar Indexes
Dan Lefkovitz, Strategist, Morningstar Indexes

Dan Lefkovitz, Strategist at Morningstar Indexes, spoke to WSR about the appetite for index-based investments. Morningstar has indexes for an array of strategies. These include equity, fixed income, multi-asset, private markets, economic moat, thematic, ESG, dividends and factors.

For example, the Wide Moat Focus Index currently has half the market exposure to technology stocks, double the market exposure to healthcare stocks, and represents where Morningstar analysts see the best valuations among U.S. companies with a sustainable competitive advantage.

Lefkovitz also moderated a conference panel titled “Should U.S. Investors Renew Their Passports?” with Christine Benz, Director of Personal Finance and Retirement Planning at Morningstar; David Herro, Chief Investment Officer, International Equities at Harris Associates; and Rajiv Jain, CIO at GQG Partners. It explored the role international equities can still play in portfolios given the outperformance of domestic stocks over the past 15 years.

He pointed to the lost decade for U.S. stocks of 2000 to 2010, when foreign stocks outperformed. Today, he sees potential in European companies that derive most of their revenue from outside Europe, Japan’s long-awaited rebound and India’s economic growth.

“I’m a big believer in global diversification,” Lefkovitz told WSR. “I believe in opening up your opportunity set as wide as possible.”

Private Markets

Sanjay Arya, Head of Index Innovation, Morningstar Indexes
Sanjay Arya, Head of Index Innovation, Morningstar Indexes

Sanjay Arya, Head of Index Innovation at Morningstar Indexes, spoke to WSR about the appetite for venture capital-focused private market investments. He noted that the rise of VC culture and greater availability of capital, as private markets evolved over the last 25 years, has facilitated a universe of approximately 150,000 private firms, from early seed stage to late stage.

In the U.S., regulatory changes, such as the Dodd-Frank Act increasing the cost of disclosure when firms go public, have prompted more companies to remain private for longer. In turn, this has led to more wealth creation options – such as secondary markets – for company insiders in need of liquidity events, who often work in the technology sector.

Abroad, particularly in major emerging markets such as China and India, the very large and homogeneous markets enable private firms to scale up quickly as they adopt new technologies without getting bogged down with legacy tech.

“As private markets become more mainstream, this will be one of the major issues that financial advisors will need to educate themselves on,” Arya told WSR. He cited Morningstar’s recent increased research coverage of the private markets and interval funds, as well as resource centers from alternative managers including Ares and Blackstone.

Interval Funds

Brian Moriarty, Associate Director, Fixed Income and Manager Research, Morningstar
Brian Moriarty, Associate Director, Fixed Income and Manager Research, Morningstar

Hong Cheng, Portfolio Manager at Morningstar Investment Management; Alec Lucas and Eric Jacobson, Directors on Morningstar’s Fixed Income and Manager Research team; and Brian Moriarty, an Associate Director on the Fixed Income and Manager Research team, spoke to the press about the bond market and the appetite for interval funds.

They showed how the yield on 10-year Treasurys went from approximately 16% at its peak in 1981 to a low of 0.52% in 2020, then increased to 4.98% in October 2023. As of June 27, the 10-year was at 4.29% with the bond market down moderately year-to-date.

Given that the 10-year typically serves as a benchmark for the yield curve, and that market expectations for Federal Reserve interest rate cuts have been scaled back this year, Morningstar’s scenario analysis suggests extending duration (bond price sensitivity to rate changes) throughout the fixed income portfolio.

Moriarity’s recent report on interval funds explored whether they are worth it to investors despite their complications and restrictions. The products often hold less liquid, high-yielding private assets. Interval funds exploded in popularity during the low-rate environment over the past decade.

Their higher expenses are often justified by the cost of running them and the advantage of their 1099-tax form status. Yet interval funds usually allow only quarterly redemptions of up to 5% of shares. So if the private funds that an interval fund invests in require capital calls while a significant amount of the interval fund’s investors are also seeking withdrawals, and that interval fund has been operating with little available cash, forced liquidation may occur.

“It can’t accommodate every kind of asset, but for a certain type of strategy it is the best,” Moriarty said. “Something that generates cash, that can facilitate an income or have redemptions, something that can be sold in weeks or months rather than years, something that matures on its own rather than going public at some unforeseen future date.”

Leveraged Loans

Katie Binns, Director of Fixed Income and Multi-Asset, Morningstar Indexes
Katie Binns, Director of Fixed Income and Multi-Asset, Morningstar Indexes

Katie Binns, Director of Fixed Income and Multi-Asset at Morningstar Indexes, spoke to WSR about the appetite for leveraged loan funds. As of June 27, it was the strongest performing year-to-date fixed income asset class that Morningstar tracks – ahead of Treasurys, investment grade bonds and high-yield bonds.

Leveraged loans have been one of the strongest performing and most stable asset classes in fixed income, going negative only three of the past 24 years. That is due to leveraged loans not being interest-rate sensitive, and typically moving opposite Treasurys. This allows them to outperform in rising rate environments. Their stability in falling rate environments comes from a guaranteed base rate plus a spread, and companies tend to borrow more when rates are low.

Recently, strength in the asset class has come from high investor demand and relatively low issuance. The latter is due to both rising interest rates and the rise in private credit, according to Binns. Therefore, even if a soft landing does occur and investment grade bond performance improves, leveraged loans stand to maintain their appeal. Financial advisors mainly access the asset class through mutual funds and ETFs for their high net worth clients.

“On the leveraged loan front, the vast majority of funds are managed actively,” Binns said. “And so with any active investment, look at manager performance, track record, fees and where they are investing from a credit quality perspective, because loans have a big spectrum of credit quality.”

Chris Latham, Managing Editor at Wealth Solutions Report, can be reached at clatham@wealthsolutionsreport.com.

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