Morningstar

We select themes based on equity research

Morningstar is growing its footprint in the structured products market on the back of new demand for thematic underlyings seeking to capture new trends and growth stories.

Morningstar, like Bloomberg, expanded its presence in the structured products market in 2022, with five of its decrement indices appearing across 33 products in France, Finland and Sweden. The indices which include the Morningstar DM Europe Large-Mid Oil & Gas Decrement 50 Point Index and Morningstar Eurozone 30 Basic Resources Banks Energy Decrement 50 GR EUR Index which sold US$60m and US50m, respectively, also had a thematic profile.

The best-selling thematic index from Morningstar in the structured products market over the last two years was the Morningstar Exponential Technologies ESG Screened Target Volatility 7% Index which sold US$65m.

According to Julien Thibaud, global head of derivatives & exchange business development for Morningstar Indexes, the term thematic means a lot of things for clients and index providers - some people classify ESG as a theme and others will call an index thematic if it relates to megatrends.

“There isn’t really a common and strict definition of thematic, but there is at least some consensus in the market,” he says. “The way we classify thematic under our index offering tends to be related to megatrends or any themes that will have an impact in the future and can be durable and lasting for investors.”

Historically, thematics were captured through a sector or revenue-based approach, which tends to be the same, essentially - looking at the past in order to identify a theme, a company or trend and then make the assumption that something that has happened overtime will be relevant to that theme in the future.

“Our approach is different in that is based in extensive equity research,” says Thibaud. “Our index business has created a bridge with Morningtar’s equity research team to incorporate their fundamental insights on the investment theme into the index methodology.”

According to Thibaud, when designing thematic indexes

Morningstar looks at the term “thematic exposure” in a slightly different way.

“The index framework enables us to build indexes with bigger thematic purity and ultimately empower client success,” says Thibaud.

Do you consider ESG as an investment theme?

If we think of thematics in a wider way, ESG is an area that fits into the thematic bucket as it focuses on a diverse set of sustainable development goals (SDGs) with different environmental, social and governance sub-themes.

This area is still difficult to measure and there is a need for more robust index approaches to measure the activities of the different companies in relation to this framework. In order to assess whether a company is linked to one or multiple SDGs – we decided to rely on a revenue-based approach which has the benefits of being objective and transparent. However, revenue thresholds are still somehow limited which in turn has an impact on the index universe alongside with the liquidity and tradability of the underlying. This is a common limitation which, throughout time and ongoing companies’ alignments efforts, will hopefully be reduced.

What developments around Morningstar’s thematic index offering would you highlight?

Morningstar has developed several thematic indices for structured products providers over the last two years.

The Morningstar Exponential Technologies ESG Screened

Target Volatility 7% Index is a good example of the incorporating an ESG filter into a thematic index. This index is used by HSBC as the basis for a structured product offering. The index is designed to provide exposure to companies positioned to experience meaningful benefits as a user or producer of promising technologies while using ESG data from Sustainalytics to screen for ESG risk.