Morningstar sees prop underlyings moving from benchmarks to investment solutions

Proprietary underlyings are increasingly being designed around specific investment outcomes rather than simply serving as volatility-control mechanisms, with Morningstar Indexes seeing demand spread across structured products, ETFs and insurance products.

Diversified allocation frameworks combining equities with fixed income, commodities, currencies, or alternative risk premia are popular - Neil McAllister

Morningstar has expanded its activity in the market as index-based solutions have become more closely linked to product design. Its indexes are available for use across ETFs, structured products, insurance products and derivatives, while its index services business offers custom index design, calculation and administration.

The firm has also developed indices for different product wrappers. The Morningstar Global Wide Moat VC 7% Index, for example, was launched for the fixed indexed annuity market, combining global equities, US Treasuries and a commodity carry component with a risk-control overlay. The index was licensed by American National for its FIA offering.

Morningstar has also licensed more than 60 indices for structured products and currently there almost 1,000 products worth an estimated US$7 billion across several markets featuring underlyings developed by the index provider, including the Morningstar Eurozone Societal Development Select 80 Index, which was licensed to HSBC, and the Morningstar Transatlantic Sustainable Development Goals Select 40 Index, licensed to Citi.

For Neil McAllister (pictured), head of derivatives products, Americas, Morningstar Indexes, the expansion reflects a fundamental change in what clients want from index strategies.

“Five years ago, much of the discussion around custom indices centered on volatility management because it directly addressed hedging budgets and option pricing constraints. Today, client demand is significantly broader and more outcome-oriented,” he said.

Clients are looking to custom indices to address outcomes including higher participation rates in indexed annuities, enhanced income potential, diversified equity exposure, downside resilience and more efficient use of capital within a structured payoff framework.

Investors are also moving beyond traditional market-capitalisation equity exposure towards diversification, factor exposures, thematic opportunities and multi-asset allocations, according to McAllister.

Design flexibility

The higher interest rate environment has influenced the design of custom strategies, with higher rates benefiting the wider structured product and annuity ecosystem.

“Higher rates have enabled greater design flexibility,” said McAllister.

In some cases, he said, clients can access more upside participation without aggressive volatility controls. Other strategies can incorporate broader diversification, income or alternative sources of return while remaining within budget.

Capital efficiency also remains important, “with issuers and insurers focusing on strategies that can deliver compelling risk-adjusted returns while maintaining predictable hedging characteristics”.

Beyond equity exposure

Concentration in global equity markets has also increased interest in multi-asset and diversified index strategies.

“Diversified allocation frameworks combining equities with fixed income, commodities, currencies, or alternative risk premia are popular,” said McAllister.

Morningstar is also seeing continued demand for factor-based approaches targeting quality, value, momentum or low-volatility characteristics within diversified portfolios.

“Basically, investors want access to growth opportunities without becoming overly dependent on a small group of stocks,” he said.

Diversified custom indices can potentially provide a more balanced exposure profile while remaining compatible with insurance and structured-product requirements.

AI becomes a design tool

Artificial intelligence is becoming more relevant to the index-development process, although McAllister said it is not replacing the investment logic and governance required to construct an index.

“AI is already helping improve various aspects of research, data processing, scenario analysis, and index development,” he said. “It can accelerate idea generation, support large-scale testing, and help identify relationships across increasingly complex datasets.”

However, methodologies still need to be understood, replicated and systematically maintained across different market environments.

“AI is becoming a more important tool within the design process rather than replacing the process,” said McAllister. “The most successful applications will likely combine advanced analytical capabilities with strong human oversight, investment expertise, and robust governance frameworks.”

From themes to outcomes

While low-volatility and ESG strategies continue to have dedicated audiences, the market’s focus has shifted towards concentration risk, inflation sensitivity, income generation and diversification, according to McAllister.

Morningstar is seeing increased interest in outcome-oriented solutions, multi-asset frameworks, active factor allocation and thematic exposures linked to areas such as AI infrastructure, digitalisation, energy transition and demographic change.

“Ultimately, investors appear to be placing greater emphasis on practical portfolio outcomes rather than broad thematic labels,” said McAllister.

Wrapper convergence

Morningstar sees a broader convergence between product wrappers, with sophisticated strategy indices increasingly serving as a common investment engine across multiple product formats.

“Historically, different wrappers often relied on different underlying benchmarks,” said McAllister. “Today, sophisticated strategy indices are increasingly serving as a common investment engine across multiple product formats.”

A diversified index strategy can appear in an indexed annuity, structured note or ETF, with each wrapper delivering different risk-return characteristics while drawing from the same underlying methodology.

Morningstar’s activity provides examples of its index business across these markets, from the Global Wide Moat VC 7% Index in the FIA market to ESG and impact-oriented indices developed for structured products.

“This convergence benefits manufacturers and investors,” said McAllister. “When done thoughtfully, it allows index innovation to scale across product ecosystems while creating greater consistency and transparency around the underlying investment exposure.”

Next wave of innovation

Looking ahead, McAllister expects outcome-oriented portfolio construction to remain a key area of growth, with investors increasingly seeking solutions designed around goals such as growth, income, diversification or downside management rather than traditional asset-class labels.

Diversified multi-asset frameworks are also expected to grow as investors seek to reduce concentration risk while gaining exposure to a broader opportunity set, particularly in insurance and structured-product applications.

There is also increasing interest in accessing sources of return historically associated with private markets through liquid, transparent and rules-based strategies, according to McAllister.

“While custom indices are not substitutes for private assets, they can help capture certain economic themes or return drivers in a format that is easier to implement and scale,” he said, adding that the custom index market is moving from a benchmarking mindset to a solutions mindset.

“Whether the wrapper is an indexed annuity, structured note, or ETF, the focus increasingly starts with the investor outcome and works back to the index design. That's creating a much larger opportunity for innovation than we've seen historically,” said McAllister.

This Q&A is published in full as a preview of the SRP Custom & Strategy Report 2026, which includes selected extracts from the interview.

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