Morningstar offers new indexes for multi-sector funds

By Penny Pryor

Morningstar Australia is looking to solve the longstanding problem of how to benchmark a multi-sector fund with the introduction of its Morningstar Australia & New Zealand Target Allocation Index Family to Australian investors.

Consisting of five indexes each for Australia and New Zealand across the conservative, moderate, balanced, growth and aggressive risk spectrums, the indexes are divided between equity, property and fixed income and cash depending on the growth/defensive split.

"Benchmarking a multi-asset portfolio is complex. Morningstar Indexes gives investors an effective way to benchmark with our solution already built and ready to go," Morningstar Indexes Chicago-based strategist and author of the recent Morningstar whitepaper, How Do You Benchmark a Multi-Asset Fund, Dan Lefkovitz (pictured) said.

Why are they important?

Effective benchmarking solutions are now even more important as multi-asset fund options become increasingly popular. Australian multi-sector funds (including superannuation funds), for example, had some of the highest net inflows of any type of funds during the June quarter of 2021.

The Morningstar indexes are already being used in New Zealand by Pathfinder Asset Management for their KiwiSaver funds.

"The existing approach to benchmarking our funds was no longer suitable given the complexity of managing multi-sector funds. We found that using a composite benchmark created operational inefficiencies," Pathfinder Asset Management co-founder and chief investment officer Paul Brownsey said.

"By using Morningstar's Target Allocation Indexes, we no longer need to blend and calculate our benchmark return; it is built for us, providing greater consistency in measuring our performance."

For the most part, the Morningstar indices mean that many funds will no longer have to devise their own custom benchmark.

How are they calculated?

The Morningstar white paper explains how the indexes Australia and New Zealand set their equity allocations to the category midpoint.

"For example, the Morningstar Multisector Balanced Category is defined by 41 per cent - 60 per cent growth assets, thus the midpoint for the Balanced Index is 50 per cent. Leveraging Morningstar's survivorship-bias free database of investment portfolio holdings, Australian and New Zealand category averages drive index weights within the stock, fixed income, and cash sleeves," the paper explains.

"This aligns the indexes with actual investment behaviour of multi-asset managers. Short-term fluctuations in the asset mix are smoothed out by using a three-year look-back period."

"Morningstar's range of single-asset indexes fill the sleeves. These building blocks are pure and nonoverlapping-the most commonly used exposures by professional asset allocators. The methodology is transparent and the resulting benchmarks replicable," the paper says.