Increasing Demand for Mixed Asset Portfolios Spurs New Tracking Index

The growing interest among investors to blend exposure to both private and publicly listed stocks has led to the creation of a new benchmark by Morningstar.

Introducing the Modern Market 100 Index

Morningstar, together with PitchBook, has launched the Modern Market 100 Index. This pioneering index merges both public and private equities, showcasing the performance of 90 large public companies and 10 significant venture-backed firms in the U.S.

This 90/10 distribution is intended to depict the contemporary asset landscape. The present-day market is characterized by expanding opportunities within the private sector, allowing firms like OpenAI and Stripe to maintain their private status longer.

"The necessity for companies to go public has diminished since they can secure substantial funds privately," explained Sanjay Arya, Morningstar's head of index innovation. "Overlooking these companies means missing out on some of the most dynamic and rapidly growing companies today."

Reflecting Economic Trends

Despite the U.S. public stock market’s approximate $60 trillion value overshadowing the $8 trillion valuation of private equity, private firms often signal economic directions. Arya pointed out that indices traditionally offer insights into economic conditions and potential investment avenues.

Recent policy changes, notably under former President Donald Trump, have opened the door for alternative assets to be included in 401(k) plans, potentially boosting this trend further.

Benchmarking Challenges and Innovations

The journey to create this index began four years ago. Arya discussed the necessity of establishing a systematic approach for melding public and private assets, given the pricing complexities of private assets. Collaborations with platforms like Caplight and Zanbato were critical in aggregating transaction data.

The index undergoes regular assessments, including liquidity checks, quarterly revisions, and daily data calculations, ensuring accuracy and relevance.

Risks and Opportunities in the Modern Market 100

The index leans toward large-cap, growth-oriented companies, particularly in the tech sector. This focus implies an inherent risk if the tech sector faces declines, as current valuations for tech giants are perceived as optimistically high.

Conversely, the index might capture superior returns. A Morningstar white paper highlighted that the Modern Market index posted a one-year return of 28.2%, outpacing the S&P 500’s 20% gain over the same timeframe.

A Broader Investment Perspective

Arya emphasized that this index offers a distinct investment perspective, diverging from traditional benchmarks. Companies like OpenAI, valued at a staggering $500 billion, represent massive potential often absent from most investors' portfolios.

He noted that benchmarks continually adapt to highlight what drives economic development. From the foundational days of the Dow Jones with railroad giants to today’s innovation-driven era, these shifts underscore evolving investment landscapes.

"Capturing a fuller picture of the innovation economy, which remains heavily entrenched in later-stage ventures, provides pivotal insights," Arya noted, "offering investors a clearer view of shifting economic dynamics."