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Morningstar's CEO on low-cost investing, AI, and tuning out the noise

Introduction: Kunal Kapoor, CFA, is CEO of Morningstar. Prior to taking this role in 2017, he served as President, responsible for product development and innovation, sales and marketing, and driving strategic prioritisation. He joined Morningstar in 1997 as a data analyst and has served as Director of Mutual Fund Research and was part of the team that launched Morningstar Investment Services, Inc.

Kapoor recently visited Australia, and the following is an edited transcript of an interview that he did with Firstlinks' James Gruber.


James Gruber: Welcome, Kunal. What brings you to Australia?

Kunal Kapoor: Well, I've been accused of following Taylor Swift around, but that is definitely not the case. I'm here obviously because Morningstar has a large presence in Australia and just an opportunity to meet clients, checking on our teams, that kind of thing.

Gruber: You've come as markets reach record highs. Is it a time for investors to rejoice or to be cautious?

Kapoor: You should always be happy when your portfolio looks good, but it's certainly not a time when if you look at our coverage list, that our analysts are saying that there's a whole plethora of opportunities. And so, I'm not one to ever suggest timing the markets, but I do think it's reasonable to assume that we're not going to get the types of returns in the equity markets in particular over the next 12 to 36 months that we maybe have gotten over the past year. At least having moderate expectations is a good idea.

Gruber: The active versus passive investing debate seems to roll on. David Einhorn has been in the press recently. What are your thoughts on that debate?

Kapoor: Well, first of all, it's important to remember that not only is it a passive versus active debate, but it's a high cost versus low-cost debate. And on that score, there's no doubt that low-cost wins. So regardless of where you fall in the spectrum, make sure you're a low-cost investor. Secondly, I do think most investors can do just fine in either passive or active. The more important things you need to care about are saving appropriately, making sure when you build portfolios that you actually stick with them, and appropriately taking on risk to match the goals that you're trying to get at. But I do personally believe that active can add value. I also think it's perfectly reasonable to believe that you want to keep it simple and not worry about it and just have a passive portfolio. So, you can do things in ways that make sense for you, but keep costs low, save a lot, and stick with things for the long term as long as they line up with your goals. And those are more important facts than any debate on active passive or anything else will get you.

Gruber: AI is all the rage. What's your take on it?

Kapoor: Well, there's certainly an element of hype to it, but there's a big element of reality. And I think sometimes people get put off by the conversation because there's been so much hype, but it shouldn't take away from the fact that in reality it is here to change the way we do things. And I think in particular, if you're an investor, imagine the ways that some of the friction in how you do things could be taken away. Or even here within Morningstar, if you look at the way we've been able to expand our quantitative rating, it's on the back of machine learning and AI that we've gone from being able to cover a certain subset of securities to now large universes. And so, to me, that's exciting. The use cases are plentiful. You don't have to invent technology, but you have to use it to transform the way you're doing things and remove friction. And that's why I'm excited about it.

Gruber: I have to ask about this, U.S. elections. Have you got a tip?

Kapoor: My tip, I believe, is a good one, which is you should not care. In general, I believe the election…

Gruber: As an investor?

Kapoor: Yeah, I mean, it's a great sport to pay attention to it, but as an investor, all it does is take you off your goals. And so don't let short-term macro events have as big an impact on your portfolio as you sometimes can allow, because it's the fact that you're listening to the noise. Tune it out, stick to your goals, and congratulations whoever wins the election.

Gruber: Morningstar Sustainalytics is in the ESG business and ESG has copped a lot of flak recently. What do you make of that?

Kapoor: I think, first of all, that some of it is fair in the sense that there was some greenwashing and over-enthusiasm. It's sort of like with AI now, people just attach those letters to every sentence. Having said that, I think it also shows just a lack of understanding of the use cases around ESG. It's not just about whether you believe in investing in fossil fuel companies or not. It's much broader. It's about personalization. You and I have different preferences in our life and a portfolio is a fantastic way of expressing those preferences. And so ESG allows us to do that. You may choose to emphasize a bi-Australian portfolio. I may choose to emphasize an equal-pay portfolio. Both could be used; not controversial I think in the context of what each of us cares about. And I think importantly, through ESG data you can engage people to make those kinds of choices. So, I think a lot of what is controversial about ESG is that it's viewed as binary. You either are in or not. It's not true. You can use the data in a way that makes sense and personalize your portfolios and express your preferences. And I think that's a good thing because it leads to engagement.

Gruber: You've been in the investing game a long time. What's the one trait or skill that successful investors have versus those that are less successful?

Kapoor: I don't know about one trait, but I think an important trait is to tune out the noise. And it's so easy to get distracted. It's so easy to get caught up in the headlines. It's so easy to worry about what the elections are going to mean for your portfolio. And all of that does not matter. What matters is do you save enough? Are you investing with the right goals in mind? And then ultimately do you stick it out to see those goals come to life? Because that's what investing is about. It's about getting to the outcome, and when you get to the outcome, to feel good about what you've done. You're ultimately trying to achieve your goals. And I think keeping that lens in mind is good.

And ultimately, look, it is a little bit about practice as with all things in life. And I found personally in my own investing journey that having kind of gone through a few periods where I have not reacted or I've made a mistake, you learn from those and then reapply them. And I think that's very powerful. And so, I'd say it's okay if you make a couple of mistakes, because we all do. But the key is, you learn the lessons from them and then incorporate that and the approach that you take going forward.


James Gruber is an assistant editor at Firstlinks and



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