Interview with Michael Holt, Chief Strategy Officer of Morningstar: Actively participate in the transformation of China's wealth management industry

In 1984, Joe Manswito founded Morningstar in the bedroom of an apartment in Chicago with an initial investment of $80,000. The name Morning Star is taken from the last line of Walden: "The sun is nothing but the morning star." Joe Mansweto was struck by the word "Morningstar" because it symbolizes independence and a new perspective, and just as he hoped: the company would provide investors with independent, reliable investment research that would help them make more informed decisions and give them hope in wealth management.

This year marks the 40th anniversary of Morningstar, which began by aggregating basic information and data on mutual funds, and has expanded its business to 33 major markets around the world, aiming to provide investors with professional analysis and rating of funds and stocks, as well as convenient and practical analysis application software tools. After 40 years of development, the company has become one of the major investment research institutions in the United States and an authoritative institution for public fund rating, providing services covering all links in the investment, research and investment advisory chain.

In 2003, Morningstar opened its first office in China and began to enter the Chinese market, and has been operating in China for more than 21 years. Recently, Michael Holt, Morningstar's global chief strategy officer and president of global investment research, said in an exclusive interview with a reporter from the Securities Times, "Morningstar has witnessed the development and growth of China's fund industry and participated in it, and it can be said that Morningstar has made a lot of achievements in China. The Chinese market is particularly important for Morningstar, which is not only the world's second-largest fund market, but also serves a client base of more than 1 billion. At a time when China's wealth management industry is at an important turning point, Morningstar hopes to continue to cultivate the Chinese market and actively participate in China's asset management, and participate in the reform wave of China's wealth management industry. ”

Securities Times reporter (left) interviewed Michael Holt (right), Chief Strategy Officer and President of Global Investment Research at Morningstar

On April 13, Morningstar held an important summit with global influence in Guangzhou for the first time, which not only shows Morningstar's next step of attention to China's capital market and investment development, but also represents the industry's next step of more general attention to the asset management industry and investment advisory industry.

Deeply involved in the reform of China's asset management industry

On April 12, the State Council issued the "Several Opinions on Strengthening Supervision and Preventing Risks and Promoting the High-quality Development of the Capital Market" (hereinafter referred to as the "New "National Nine Articles"). The new "National Nine Articles" put forward the development goals of the capital market in stages for the next five years, by 2035 and by the middle of this century, and introduced a series of measures to this end. Some of these measures have pointed out the development direction for the public fund industry, such as the new "National Nine Articles" proposing to vigorously develop equity public funds, greatly increase the proportion of equity funds, promote the development of indexed investment, change from scale-oriented to investor return-oriented, and gradually reduce the comprehensive rate of the public fund industry.

Michael Holt said in an exclusive interview with the Securities Times that the newly introduced policy has made a clear plan for the development of China's capital market in the next decade, and has a very clear blueprint. In this new era, China's asset and wealth management industry has two very specific driving forces: one is the advent of the era of low interest rates, the current 10-year government bond interest rate level has reached about 2.3%, in the low interest rate environment, traditional savings and fixed income products provide relatively low returns, which prompts investors to look for higher yield investment channels, such as stocks, bonds, Funds and other products, wealth management services can provide more diversified investment products and strategies, helping investors explore more diversified investment portfolios to diversify risks and achieve more stable asset appreciation. Second, the China Securities Regulatory Commission (CSRC) has promoted the reduction of fees for the entire public fund industry since last year, especially the reduction in sales fees that will occur in 2024, which is very important for the transformation of the wealth management industry.

"Profit-making investors is also something Morningstar has been trying to advocate. Of course, I am not against fund companies charging management fees, but I am saying that fund companies should put investors at the center of everything they do in financial services, so that investors can trust you, and the best way to have trust is to establish an incentive system that puts investors' interests first. Michael Holt said.

Over the past 21 years, Morningstar (China) has been deeply involved in and witnessed the rapid development of China's mutual fund industry, and its own business layout has been deepened with the growth of the domestic wealth management market itself. According to statistics from the Asset Management Association of China, as of the end of February 2024, the total net asset value of domestic public funds was 29.3 trillion yuan, approaching the 30 trillion yuan mark.

In this regard, Michael Holt told reporters that the number of funds in China is more than 10,000, the scale is close to 30 trillion yuan, and the growth is very rapid, although the overall scale is still smaller than the US market, but the interesting thing is that China's wealth management industry is undergoing a new transformation. In the face of such an opportunity of the times, no institution wants to miss it, and Morningstar is no exception. As the world's second-largest economy, China's mutual fund market continues to grow, which is a huge motivation for Morningstar to focus on the Chinese market, and it is constantly investing more resources to become part of the story of China's wealth transformation.

"Now is the perfect time for investment advisors to enter the market, and the Chinese market is also changing from the fund sales model to the fund investment advisory model, although the two will coexist for a long time, but learning from the mature markets in Europe and the United States, it can be seen that the investment advisory business is the main advantage of the institution to compete, because the investment advisory model is consistent with the interests of investors, which can also help institutions to better win the trust of investors. If we can play an active role in improving the investment process and investment experience for Chinese fund investors, it will also bring us commercial success. Michael Holt said.

Dismantle fund fees to enhance investor experience

When asked by reporters about the common phenomenon of "investors' returns underperforming fund returns" in China, Michael Holt admitted to reporters, "This is indeed a very interesting phenomenon, this kind of investment gap - the investment gap between the performance claimed by fund companies and the actual returns of investors, is a subject that we spend a lot of time studying." Many fund companies may like to use past historical performance to attract the attention of investors, resulting in a high return expectation for them, but in the case of weak market or market conditions, most of the people have suffered a large drawdown, and the fund's money-making effect has weakened significantly, so it will also lead to the people's distrust of institutions."

Michael Holt said that Morningstar (China)'s strategic goals for the next stage will be from two dimensions, one is the products and tools for C-end users (individual investors), and the other is the business level, deeply involved in the investment advisory and wealth management business industry chain.

"There is now a broad consensus in the industry that the investment advisory model is a positive way forward, and we are trying to work with different partners to help people make better investment decisions by providing a range of tools, ratings and multi-dimensional data, which is no longer designed around creating transaction frequency, but focuses on understanding your customers and improving their investment engagement and well-being. Put them at the center of the whole investment advisory and make them understand that the investment journey will be volatile, not linear, and they will not have any negativity even when the market is volatile, so that the industry can develop healthily. Michael Holt said.

What Michael Holt called the turning point for Morningstar's development in China was 18 months ago, "We learned through communication that the issue of fees for Chinese funds needs to be taken seriously by the public, and since then, we have focused on the research of the investment gap between the fund's comprehensive fees and investors' returns and the fund's returns to ensure that they can understand these data points well." ”

As we all know, the process of fund investment is mainly divided into three links: buying, holding, and selling, and each link will incur corresponding fees, and the people are most familiar with the one-time fees paid in the purchase and redemption links. But in reality, the cost of a fund is much more than that.

Morningstar carefully dismantled the cost of holding for the Chinese people. According to Morningstar, the holding cost of the people is divided into explicit costs and hidden costs, the former includes management fees, custody fees, sales service fees, and the latter includes operating fees and transaction fees. These hidden cost data can actually be found from the semi-annual or annual reports publicly disclosed by fund companies, but it is difficult for investors to compare these data vertically and horizontally to form a comprehensive and clear concept of rates.

As a result, Morningstar excavated these fees and converted them into percentages, forming a tooled product that investors can quickly query the comprehensive cost of their funds.

Michael Holt believes that in the European and American markets, the level of fund fees has always been one of the key factors for investors to choose funds, but in the Chinese market, the issue of fund fees has not been paid enough attention by investors, Morningstar has done a lot of research on the fee rate, and deeply understands the impact of fund fees on the success of the portfolio and the ultimate investor, so as to help investors understand the cost of the fund they hold, make a more rational choice, and improve the holding experience.

In the context of fee reduction, the mutual fund industry is standing at the crossroads of change. Change the existing benefit distribution pattern by reducing fees and profits, and promote wealth management institutions to complete the transformation from a "seller's market" with sales as the core to a "buyer's market" with services as the core, so as to truly enhance investors' long-term sense of gain. This is also the essence of Morningstar (China)'s continuous development of rate query tools.

The Chinese market is very attractive

When asked how he would evaluate the performance of China's stock market, Michael Holt said that when market sentiment is negative, it is usually the best time to invest. At present, Chinese investors are bombarded with various return data and relative performance data, turning investment into a speculative game. In fact, investing ultimately comes back to fundamentals, and when buying a stock, investors think about the intrinsic value of the company and the cash flow it will generate, trying to understand whether these high-quality companies are priced correctly, understanding the difference between investment and speculation, and the long-term goals and acceptable risk range as an investor.

"Our entire investment strategy is based on estimating the intrinsic value of securities, so we see some opportunities in the Chinese market, and we are currently optimistic about the long-term health of the Chinese economy, even though geopolitical risks make it more difficult for some companies to operate and make profits. We consider China in our investment strategy because we are confident in the long-term fundamentals of the Chinese economy. Michael Holt told reporters.

In addition, Michael Holt also talked about the understanding of "new quality productivity", which he believes that China is currently vigorously advocating, not a simple transformation of the manufacturing industry, but a transformation of the entire manufacturing and service-oriented economy. From an investment perspective, this will put Chinese companies or industries in a more defensive position in the world competition. It's very difficult to maintain a long-term advantage because of the focus on low-cost "price wars", and it's only by moving into more advanced technology that these companies will become stronger and healthier, which is a very exciting shift.

"China has always been a top priority for Morningstar, not only is China the second largest public fund market in the world, but there are more than 1 billion people here that we can help with. I firmly believe that we can provide better investment research services to help investors achieve their investment goals. Morningstar is currently working hard to localize its investment tools and data to ensure its usefulness in the Chinese market to benefit more investors. Michael Holt said.

Editor-in-charge: Ye Shuyun

Proofreading: Peng Qihua

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