Morningstar to launch India-specific indices

To expand equities research to 75-100 companies in next 12-18 months.

Investment research firm Morningstar Inc is planning to launch India-specific indices soon to tap growing demand for exchange-traded funds (ETFs) among investors in Asia’s third-largest economy.

The Chicago-based company has 16 style indices in the US which track the world’s biggest stock market by market capitalisation and investment style. For its indices, Morningstar has classified market capitalisation into three parts – large cap, mid cap and small cap, while it has categorised investment style into three ways — value, core and growth. The company’s 16 indices are a combination of these two factors.

To begin with, Morningstar is planning to launch a few of these indices in India and see the response. “We are internally working on some of these indices. Any mutual fund company can approach us and develop ETFs based on these indices,” said Aditya Agarwal, managing director at Morningstar India. “ETFs have grown rapidly in the US. I am sure that will happen in India too,” he added.

An ETF is a security that, like an index, tracks an index, a commodity or basket of assets funds, but trades like a stock on an exchange. They can be bought and sold through a trading day.

Average assets under management (AAUM) of ETFs in India more than tripled to Rs 11,227.43 crore during the April-November period this year, from just Rs 3,530 crore in the April 2007-March 2008 period, data available on the Securities and Exchange Board of India (Sebi) website showed.

“An ETF is a great product, both for mutual fund companies and investors,” Agarwal said. “ETFs have grown rapidly in the US. I am sure that will happen in India too. As the Indian stock market matures, beating the index every time will not be possible. Passively-managed products like ETFs will become attractive among investors.”

The ETF industry in the US had 1,039 ETFs and assets of $973.5 billion as on June 30, compared with 846 ETFs and assets of $693.2 billion at the end of June 2010, according to an industry review report from BlackRock, the world’s largest asset manager.

Morningstar also plans to beef up its equities research offering in India, which it had launched last month for both local and institutional investors. “We are covering 7-8 Indian companies at present. Gradually, the plan is to cover 75-100 companies in the first 12-18 months,” Agarwal said.

In its equities research, Morningstar gives rating to stocks to identify whether they are trading at a discount or premium to their intrinsic worth or fair value estimate.