A Star Rises Over Fixed-Income
By Journal of Indexes Staff

Morningstar unveiled plans for a major expansion of its index franchise, moving beyond equities for the first time and into the fixed-income arena. Calling the asset class "ripe for competition," Morningstar said it would win market share by offering more retail- and investor-friendly indexes.

"There's a lot of room in the fixed-income space for people to do interesting and investor-friendly things," said Eric Jacobsen, head of fixed-income research.

Jacobsen highlighted two major shortcomings with the current generation of fixed-income indexes: transparency and accessibility. The fixed-income space is dominated by Lehman Brothers, an investment bank serving (primarily) institutional clients. As a result, says Jacobsen, Lehman's indexes are designed, priced and managed with institutions in mind. It can be difficult and/or pricey, for instance, to find out data on the individual bond holdings in most fixed-income indexes. That can make it difficult to accurately evaluate the performance of a bond fund manager. Morningstar hopes to open up the process with tiered pricing and increased transparency.

Beyond accessibility, the company believes that certain benchmarks are unwieldy for investable products. The fixed-income space is enormous, with a huge number of issuers, and liquidity patterns for individual bonds vary widely. To accommodate that, Morningstar will launch two new sets of indexes:

Benchmark Indexes: Market-cap-weighted indexes with broad coverage, which will be used primarily for market monitoring and performance benchmarking.

Investable Indexes: More targeted indexes that focus on liquidity and market float, which will be used for investable products.

The company expects to launch its first indexes in the first quarter of 2007. The group will focus first on corporate credits and Treasuries, and gradually expand into more obscure securities over time.