With almost 50 custom & strategy underlyings deployed in the retail structured products market, Morningstar has built a comprehensive shelf in a short period of time and carved its own space in the market.

SRP data shows that Morningstar’s indices have been featured across more than 600 products with over US$3.5 billion in assets under management (AuM). Although most of the indices have been licensed in Europe, Morningstar has also been making inroads in the US and China markets.

SRP spoke to Neil McAllister (pictured), head of derivatives products Americas, Morningstar Indexes, to discuss the market environment and the company’s short-term goals.

How would you describe the current market environment and its impact on the use of custom underlyings?

Neil McAllister: Market uncertainty and unpredictability have increased the level of caution among our clients, slowing new index launches among distributors. We are seeing less new launches in Europe, particularly due to uncertainty over tariffs and global economic conditions.

The market remains focused on straightforward and fashionable sectorial exposures such as aerospace, defense and sovereignty-themed indices 

Yet while new launches have moderately slowed, there’s been an increase in notional value in existing indices. So essentially, fewer new index concepts with strong issuance.

The market remains focused on straightforward and fashionable sectorial exposures such as aerospace, defense and sovereignty-themed indices.

Banks, Basic resources and Tech stocks are still actively trading and gathering assets, but there are fewer innovative index ideas, especially in the French market.

Single name indexes with decrement features have seen an impressive pickup in the last year. These strategies are popular with retail clients regardless of their inherent risks.

Despite their popularity, we have decided not to promote and launch such solutions as we see little or no added value for the index provider.

The inherent idiosyncratic risk coupled with the syntheticdividend overlay (decrements in index points) presents disproportionate risks towards investors. Although most investor outcomes have been positive, we see increasing tail risk on some single names, with Stellantis a case in point.

With an increasing number of custom underlyings on offer, is there a risk of market fragmentation?

Neil McAllister: While overall notional values have gone up in recent years, we’ve seen an exponential increase in new index products. Issuances tend to have smaller average notional values.

We’re witnessing a decorrelation between the number of products launched versus notional raised, which ultimately leads to market fragmentation. Instead of bulky trades, a large portion of the index activity is around smaller, more customized solutions. Issuers are creating products for significantly smaller client bases or mandates.

The paradigm for index providers has therefore gradually shifted around three critical pillars: intellectual property (data and research), time-to-market and index costs.

The indexing world is evolving, with new competitors entering the market. The trend is towards more personalized, tailor-made index solutions that can be deployed quickly and at a lower cost.

Historically, an index needed to gather around US$250 million to be successful, but now even US$100 million is considered a good outcome for a single index. More products are being created across a wider range of smaller investments facilitated by improving technology and more efficient operations.

What are Morningstar’s plans in the US structured products market?

Neil McAllister: The US market, particularly the fixed index annuity (FIA) space is a top priority for Morningstar Indexes. This market offers more flexibility in index deployment compared to European markets and has fewer regulatory constraints.

Our focus in the US is on creating indexes that speak to retail clients and aim to deliver robust investment strategies as well as providing new bespoke and innovative approaches.

The market is evolving from US stock-only indexes to more diverse exposures. We see demand and opportunity around multi-asset and global strategies typically with risk control overlays.

There is increasing sophistication in index design in the annuities market, with carriers seeking to differentiate themselves through more multifaceted strategies, such as intraday volatility targeting, multi-asset approaches and more intricate calculation methods.

Educational challenges remain in this part of the market as retail clients likely do not fully understand complex index strategies. Brand recognition matters in the annuity market.

There is scope for growth for Morningstar as carriers want indexes not exclusively affiliated with banks and there is a desire to shop around for the best hedging prices.

Where does Morningstar stand when it comes to complexity and risk?

Neil McAllister: We believe complexity must provide real value to investors to be justified. Complexity should not be added just to make an index look noticeable. There is a risk of over-engineering.

Creating overly complex strategies can be problematic as the end investor should understand the true mechanics of the strategy they are investing in. Complexity should not come at the expense of investor understanding.

At Morningstar Indexes, we believe that simple messages can be more effective, especially for retail and retirement products where long-term value and prospects are crucial.

Recent market dynamics, which have been dominated by the performance of the Magnificent Seven stocks, have been challenging for factor-based or non-market-cap indexes. We see increasing interest in multi-asset strategies typically with a predominance of Equity (US, Global, Global ex US), Fixed Income (Treasuries) and Commodities. Risk Control overlays have become an essential tool within the FIA space.

While carriers are seeking to diversify risk away from traditional benchmarks (Typically US large Cap indexes) we’re seeing opportunity and openings around innovative underlying.

This article is an abstract from the ‘SRP Index Report 2025: Custom & Strategy Indices’, which can be downloaded here.


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