Morningstar Core Managed Portfolios Investment Services Peter Dugery Senior Vice President, National Sales Morningstar Investment Services August 21 st, 2012 For financial professional use only. 2012 Morningstar Investment Services, Inc. All rights reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. All other marks are the property of the respective owners. Morningstar Investment Services, Inc. is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. The information contained in this presentation is the proprietary material of Morningstar Investment Services. Reproduction, transcription or other use, by any means, in whole or in part, without the prior written consent of Morningstar Investment Services is prohibited.
Agenda Why Managed Money? Current Landscape Your Practice and Our Core Morningstar Managed Portfolios Platform Demonstration and Roadmap to Take Action
Why Managed Money for your Clients? Third-party managers are independent, bringing objectivity and investment discipline to the table They remove as much emotion as possible from the process They can bring greater transparency and contribute positively to a client/advisor relationship built on trust Economies of scale reduce costs of portfolio management, improve access to investments They can utilize institutional-level risk and volatility management controls
Why Managed Money for your Practice? Third-party managers can: Save you time and worry by allowing you to focus more time on planning for clients Help you build a repeatable investment experience for your clients Help you to differentiate yourself in a more meaningful way Enable you to focus on your biggest revenue-generating activities Deliver a smoother, higher-value succession plan
Five Points on the Current Landscape Evolutionary shift to Fee Based/Managed Accounts is continuing Attracting Competition Need for Product Differentiation Open Architecture ETF s as Growth Driver
Morningstar: Independent. Experienced. Well Researched. Part of Morningstar s Investment Management division Morningstar, Inc: has been researching mutual fund, stock, and Exchange Traded Funds for over 25 years Leverage proprietary data, analytics Good stewards: Invest client assets like they are our own $185.5B 34 + yrs 2 patents Total Assets* Serving Clients** Human Capital and Asset Allocation with Annuities*** 6 *Data as of June 30, 2012. Includes Morningstar Associates, Ibbotson Associates, Morningstar Investment Services, OBSR, and Ibbotson Australia. ** Ibbotson Associates Inc. was established in 1977. Morningstar Associates was established in 1999 and Morningstar Investment Services, Inc. was established in 2001. ***Patent issued to Ibbotson Associates for Asset Allocation with Annuities in 2006. Patent issued to Ibbotson Associates for Human Capital in 2007. Morningstar s Investment Management division includes Morningstar Associates, LLC, Morningstar Investment Services, Inc., and Ibbotson Associates, Inc., all registered investment advisors and wholly owned subsidiaries of Morningstar, Inc. All investment advisory services described herein are provided by one or more of the U.S. registered investment advisor subsidiaries.
About Morningstar Investment Services Objective, independent approach Actively managed mutual fund, stock and ETF model portfolios Online platform including profiling tools, proposals, and statements Professional investment management You manage your clients and your business Let us worry about portfolio construction and manager/security selection 80+ years investment experience 7
Our Investment Team Jeffrey Ptak, CFA, CPA President and Chief Investment Officer University of Wisconsin, BS 18 years of financial industry experience John Owens, CFA, CPA Investment Manager Oklahoma State University, BS University of Texas, MBA 16 years of financial industry experience Marta Norton, CFA Investment Manager Wheaton College, BA 7 years of financial industry experience Sean Hynes, CFA Investment Manager University of Notre Dame, BS Carnegie Mellon University, MBA 8 years of financial industry experience Paul Gozali, CFA Director of Quantitative Analysis University of Iowa, BS University of Iowa, MBA 21 years of financial industry experience Venus Phillips Investment Manager Howard University, BBA University of Chicago, MBA 6 years of financial industry experience Sam Yan, CFA Quantitative Analyst Tsinghua University, BS University of Illinois, MS 12 years of financial industry experience 8
Our Philosophy We invest for the long term We are independent thinkers We employ a disciplined, consistent investment process We actively manage portfolios We are sensitive to costs and taxes We invest clients money as if it were our own We communicate in a timely and candid fashion 9
Morningstar Investment Services: Core Holdings Independent research Long track record Mutual fund portfolios launched in 2001 ETF portfolios launched in 2007 Utilize Morningstar, Inc. s extensive research Broadly diversified portfolios Use of alternatives 10
Creating Core Portfolios 11
Our Investment Process Our continual four-step process is designed to help the portfolios stay well-positioned through the market s up and downs 12
What Sets Us Apart? Portfolio construction Ibbotson Associates Incorporating alternatives Research GPA Boutique managers Risk-management Stressing risk-adjusted returns Using flexible managers Experience Decade-plus track record 13
Portfolio Construction: Ibbotson Associates Ibbotson Associates, a Morningstar, Inc. company, sets the strategic asset allocation of our diversified portfolios Methodology rooted in 30+ years of research and investment theory Asset allocation is critical in determining a portfolio s risk and return characteristics Ibbotson s use of alternatives in asset allocation is unique Efficient Frontier Asset Class Models Expected Returns Standard Deviation Covariance Asset Class Forecasts Determine an efficient mix: mean-variance optimization Create asset class recommendations 14
Research: Rigorous, Independent We do our own work Draw on decades of experience researching managers Leverage proprietary data, analytics, grading system Look beyond the stars, style box The world is our oyster Use any fund available to us No select list From our base in Chicago, our investment team travels across the country, meeting with each manager in person. 15
Fund Selection: GPA Fund Evaluation System 16
Research: GPA Report Examines five critical factors: Process Performance People Price Parent Performance and price grades updated monthly Qualitative factors monitored, adjusted on an ongoing basis React to events, not calendar GPA Report Excerpt Source: Morningstar Investment Services, Inc. For illustrative purposes only; past performance is not a guarantee of future results. Should not be viewed as a recommendation buy or sell the mentioned securities. 17
Research: Using Boutique Managers 18 For illustrative purposes only. Morningstar Investment Services is not affiliated with companies shown.
Risk-Management: Built Into Our Process Disciplined Asset Allocation Rigorous Fund Evaluation and Selection Cohesive Portfolio Construction Continuous Risk Management Strategic Allocation Long-term risk/return profile Diversify across asset classes Quantitative Analysis Performance analysis Risk metrics Portfolio Level Holdings-based analysis Manage to target risk Monitor fund overlap Monitor Managers Portfolio positioning Risk factors Tactical Overlay Over/underweight relative to strategic allocation Qualitative Due Diligence Interview managers Peruse SEC filings Hold on-site visits Fund Level Tailor fund to strategy Contribution to portfolio risk and expenses Adjust Rebalance accounts Top-down adjustments Fund specific changes Evaluate fund company stewardship 19
Our Mutual Fund Portfolios Our Core Mutual Fund Portfolios 20
Core Portfolios: Diversified Mutual Fund Portfolios Diversified mutual-fund portfolios Invests in actively-managed funds Well suited to anchor core of a portfolio Pair well with specialized strategies Conservative Income & Growth Moderate Growth Growth Aggressive Growth 21
Asset Allocation of Our Retirement Income Portfolios Ultra Short Short-Range Mid-Range Long-Range Targeted Payout 7% 6% 5% 4% Time Horizon 1 5 years 2 10 years 10 20 years 20+years Probability of Principal Preservation Probability of Principal Depletion 2.1% 9.9% 17.3% 36% 0.1% 0.1% 0.4% 0.8% Monte Carlo Analysis, 95% Confidence Interval with payouts adjusted for inflation. 22
Diversification: Retirement Income s Asset Allocation Stocks Growth Engine Domestic Small Caps Domestic Large Caps International Emerging Bonds Income Producer Investment-grade High-yield Non-U.S. Inflation-protected Alternatives Volatility Dampener Commodities Real estate Long/Short funds Arbitrage strategies 23
The Ibbotson Active/Passive Series Focus on fees Note that the passive portion of a portfolio may be invested in a combination of indexed mutual funds and ETFs, or simply indexed mutual funds, depending on custodial arrangement. For illustration purposes, we have grouped the sub-asset allocations together, showing only the six broad asset classes above. Weightings are subject to change. All investments involve risk, including loss of principal. Past performance is no guarantee of future results. Diversification does not assure a profit or protect against a loss in a declining market.
Our Diversified ETF Portfolios 25
The Case for Our ETF Portfolios Wide diversification Ibbotson Low cost Internal model expenses: 0.15% - 0.20% Benefits of active, passive management Core-and-explore format Disciplined, methodical approach Leverage Morningstar s research Conservative Income & Growth Moderate Growth Growth Aggressive Growth 26
Core and Explore Approach Core Broadly diversified ETFs Passive and low cost Track asset classes in strategic asset allocation Explore + ETFs that track narrower segments (style, sector, region, etc.) Selection based on proprietary rating methodology Aim to add value over index 27
Tactical Decision-Making 28
Select Stock Baskets 29
Our Select Stock Baskets Custom Series at a Glance Customized portfolio of individual equities 25 to 35 of our highest conviction stock ideas Tailored to a client s needs Restrict sector, industry, or individual stock exposures Combine with a portfolio of fixed-income mutual funds or ETFs (80/20, 65/35, 50/50) Accommodate current holdings* Transfer existing holdings Portfolio can be built around client s other holdings Actively managed to achieve added value Buy and sell discipline Optimal balance of risk and reward Mindful of tax and cost implications *Initial and subsequent funding in the client s account may be in cash, and/or transfer of positions currently held including common stocks, ETFs and mutual funds; due to liquidity restrictions and trading constraints, any position that is transferred in my be rejected and required to be remove from the account. For Illustrative Purposes only. Data and information is subject to change at anytime without notice. 30
Select Stock Baskets Custom Series Broad Market Global Equity Composite Style Equity Income Capital Appreciation Foreign Market Capitalization Foreign Equity Small+Mid-Cap Equity You can elect further customization $250,000 account minimum 31
Select Stock Baskets Strategist Series Select Stock Basket strategies to choose from The Tortoise Portfolio The Hare Portfolio The Dividend Portfolio These three are patterned after Morningstar, Inc. s popular monthly newsletters Morningstar StockInvestor Morningstar DividendInvestor Account minimums All Equity - $100,000 With Fixed Income (80/20, 65/35, 50/50) - $250,000 32 For illustrative purposes only. There is no guarantee that the Select Stock Basket Strategist Series will perform as the portfolios after which they were patterned. *Please note that portfolio availability may vary based on business relationships
Mutual Fund Portfolios - Fee Structure Maximum Fee Schedule Mutual Fund Portfolios Up to $500,000 Next $500,000 Next $1MM Over $2MM Morningstar Investment Services* 0.40% 0.35% 0.30% 0.20% Advisory Firm ** 1.10% 1.05% 1.00% 0.90% Total Annual Fee 1.50% 1.40% 1.30% 1.10% Account Minimum: $50,000 (lower in family plan) Minimum Exceptions: Enhanced Portfolio Service, $1MM Client fee does not include the mutual funds expenses Advisor fee can be discounted in 5 bps increments *MIS Minimum Annual Fee is $200 for those accounts not held at PFPC. **Please note that fees may vary based on business relationships.
ETF Portfolios- Fee Schedule Maximum Fee Schedule ETF Portfolios Up to $1MM Next $4MM Thereafter Morningstar Investment Services* 0.31% 0.25% 0.20% Advisory Firm ** 1.10% 1.10% 1.10% Total Annual Fee 1.41% 1.35% 1.30% $100,000 account minimum Client fee does not include the underlying ETF s expenses Client fee does not include costs associated with custody/clearing/execution Advisor fee can be discounted in 5 bps increments *MIS Minimum Annual Fee is $200 for those accounts not held at PFPC. **Please note that fees may vary based on business relationships.
Stock Baskets - Fee Structure Select Stock Baskets Up to $1MM Next $4MM Thereafter Morningstar Investment Services* 0.55% 0.50% 0.45% Advisory Firm ** 1.10% 1.10% 1.10% Total Annual Fee 1.65% 1.60% 1.55% Account minimums: $100,000 Strategist Series, $250,000 Custom Series Client fee does not include costs associated with custody/clearing/execution Advisor fee can be discounted in 5 bps increments *MIS Minimum Annual Fee is $550 for Strategist Series and $1375 for Custom Series. **Please note that fees may vary based on business relationships.
Why Morningstar Investment Services? Our focus Help fee-based, independent advisors grow their practices Our experience 10-plus years We work with thousands of advisors like you Our reputation Clients first Independence, objectivity 36
Morningstar Investment Services Sales Team General Information 877 626-3227 Internal Service mis@morningstar.com Representatives www.mis.morningstar.com Peter Dugery 312 696-6040 National Director peter.dugery@morningstar.com 37
Appendix: Disclosures The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar Investment Services shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. Past performance is not a guarantee of future results. The information contained herein is the proprietary property of Morningstar Investment Services and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar Investment Services. 2012 Morningstar Investment Services, Inc. All rights reserved. Morningstar Investment Services is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc. Ibbotson Associates is a registered investment advisor and wholly-owned subsidiary of Morningstar and serves as a sub-advisor to the Morningstar Managed Portfolios program. 38
Appendix: Performance Metrics Definitions Standard Deviation measures an investment s volatility or range of outcomes. The total returns of any given investment are expected to be within one standard deviation from its mean return about 68% of the time and within two standard deviations from the mean 95% of the time. Sharpe Ratio measures return per unit of risk. Equal to excess return (average monthly return less average monthly return of 90-day Treasury bill) divided by standard deviation. Downside Capture is the percentage of the return of the benchmark the investment captured when the selected benchmark had a negative return. For example, if the selected benchmark had a -10% return and the investment had 25% downside capture, it would have returned -2.5% during that down period. Beta is a measure of an investment s sensitivity to market movements. A low beta implies that an investment s market related risk is low. Alpha measures a fund s actual returns and its expected performance, given its level of risk (as measured by beta). A positive alpha figure indicates the fund has performed better than its beta predicted. Performance: Imposition of advisory fees and other expenses incurred in the management of an account would cause actual performance to be lower than the performance shown. For example, if the one-year performance before such fees was 10% and the account assessed an annual fee of 1.50% deducted quarterly, the fee would reduce the performance approximately 8.36% annually. Russell 3000 Index A market-capitalization weighted index that includes the 3,000 largest U.S. companies based on total market capitalization. 39