When Joe Mansueto, one of the most
successful investors in the US, looked around for his successor as CEO
of Morningstar, he had little hesitation: Kunal Kapoor, the Indian-born
executive who worked his way up to the post of president in a 20-year
career with the Chicago company, was the obvious man.
Mansueto and Kapoor share a similar investment philosophy that made the 43-year-old a natural choice to lead the financial giant to the next stage. Both believe in the intrinsic value of taking a long-term approach to investment. “It is always important to distinguish between the short term and the long term. We always want to be part of something that will unfold positively in the long term,” said Kapoor on a recent visit to the firm’s Middle East headquarters in the Dubai International Financial Center (DIFC).
Morningstar’s history bears out the attractions of long-term thinking. Founded by Mansueto in his one-bedroom apartment in Chicago in 1982 after he saw an opportunity for a new kind of mutual fund organization, the firm grew steadily to become one of the biggest investors in the US.
In 1999, it took a significant step via an investment alliance with SoftBank, the Japanese financial giant run by the legendary Masayoshi Son. Both survived the dotcom bust and the global financial crisis. Son is now an influential investment partner of Saudi Arabia’s Public Investment Fund.
Along the way, Mansueto earned a considerable personal fortune, and joined the “super investor” club in 2010 when he joined Bill Gates and Warren Buffet in the Giving Pledge, promising to give away half his wealth to philanthropic causes. That is the essence of long-term thinking, and it permeates Morningstar and Kapoor’s strategic outlook.
“We like to focus on the long-term opportunity. The geopolitics is all short-term noise,” he said.
---------------
BORN
1975, India
EDUCATION
• Kodaikanal International High School • Monmouth College, Illinois, US
• University of Chicago, Booth School of Business
CAREER
At Morningstar since 1997, becoming CEO in 2017
---------------
The geopolitics of the Middle East and its issues of security, commodity dependency and economic volatility have always been a challenge to international investors looking to exploit the region’s undoubted opportunities.
“Maybe there is short-term volatility, but we encourage investors to be long term. The investing culture has to develop further in the region, and people should realize that volatility can be a non-event if you’re thinking long term,” Kapoor said.
There is no doubt the Middle East, as part of the wider investment world, has short-term challenges. Volatility in the price of oil — still the region’s most important economic indicator regardless of long-term strategies of economic diversification — means that asset valuations and capital markets are stubbornly reliant on the price of a barrel of crude.
At the same time, regional tensions — in Iran, Qatar and Yemen — are also impediments to attracting the big money flows from global investing institutions.
Kapoor thinks these challenges should not deter like-minded, long-term strategists. From the DIFC hub, Morningstar is looking at a careful expansion in the Middle East. It already serves the UAE capital Abu Dhabi from there, and has had some success in the Kuwaiti market, he said. But the opportunities of Saudi Arabia are looming large for the firm.
“Saudi Arabia is such a large presence in the region, such a large piece of the overall pie … We’re thinking of how we partner in Saudi Arabia and how we have a bigger presence there. The effect of Vision 2030 on people and the investing community is something that would help the markets mature there, and we are in support of that, for sure,” he said.
Global investors have been blowing hot and cold on the Saudi market for much of the year. While the main stock market index, the Tadawul, was among the best-performing in the world in the first half, it has lost some of that shine since, mainly as a result of uncertainties in the oil price and other concerns.
But it is still ahead on the year, proving the positive benefits of inclusion in the emerging markets category of investment rankings by several of the leading index compilers. Kapoor believes that is the way global investment trends are going.
“I think there are only a handful of stocks in the world that are really what you would call five star, and increasingly we’re beginning to look away from the US toward emerging markets for these kind of stocks. On a relative basis we are tilting toward a non-US focus. Other markets are more attractive and this means the emerging markets in particular,” he said.
But, regardless of the attractions of the fast-growing emerging markets of the East, if there was a global downturn in asset prices, the whole world, including the Middle East, would suffer. Some experts believe global stock markets are near the end of a 10-year record of growth, and predict a “bear” market ahead.
Recent weaknesses in the highly valued technology sector, worries about the increasing cost of capital and rising interest rates, and fears over the state of the world economy, especially the effects of a trade war between the two biggest economies, the US and China, have spooked many global investors.
So, is the world on the brink of a bear market?
“I wish I had a crystal ball. We think about prospects through the lens of future valuation. Markets have been strong over the past decade and it is a rational assumption that the returns of the past 10 years will not be replicated over the next,” Kapoor said.
He does not believe macroeconomic considerations are necessarily the most important factors in deciding investment priorities.
“Macro and valuations are separate things from my perspective. It is very difficult to successfully predict macro factors and most investors are best served by not trying to let those determine how they invest. As for valuations, they are certainly better than they were a month ago, but from a historical perspective, also not among the lowest. This would suggest a lower return environment going forward,” he said.
Apart from falling valuations, Kapoor sees several other risks to global markets — inflated investor expectations, rising interest rates, and the absence next year of the one-off boost to markets from President Trump’s tax cuts, which boosted American and world markets for the first half of 2018.
The state of the debt markets is another concern. “When the financial markets make debt easily available, that is a sign that the bull run is long in the tooth,” he said.
Investment assets tend to find their own level of equilibrium over the long term, and after a long period of using indices, many investment analysts believe the world will be a tougher place in the next few years.
Kapoor appears to agree. “Markets tend to always revert to the mean, and I would not be surprised if we were near that happening now,” he said, adding that this does not necessarily mean a market collapse. “It does not have to be a crash. Markets can just stay where there are for a prolonged period.”
But it is unlikely a period of market ambivalence would distract Kapoor and Morningstar from their mission, and could even present investment opportunities. “We are trying to help investors earn good returns over the long term — helping them to build their portfolios for the long term, rather than getting distracted by the noise,” he said.
And he takes inspiration from another master of the long view, the legendary founder of US investment giant Berkshire Hathaway. “I often think of the words of Warren Buffett — that you have to be fearful when others are greedy and greedy when others are fearful,” he said.
Mansueto and Kapoor share a similar investment philosophy that made the 43-year-old a natural choice to lead the financial giant to the next stage. Both believe in the intrinsic value of taking a long-term approach to investment. “It is always important to distinguish between the short term and the long term. We always want to be part of something that will unfold positively in the long term,” said Kapoor on a recent visit to the firm’s Middle East headquarters in the Dubai International Financial Center (DIFC).
Morningstar’s history bears out the attractions of long-term thinking. Founded by Mansueto in his one-bedroom apartment in Chicago in 1982 after he saw an opportunity for a new kind of mutual fund organization, the firm grew steadily to become one of the biggest investors in the US.
In 1999, it took a significant step via an investment alliance with SoftBank, the Japanese financial giant run by the legendary Masayoshi Son. Both survived the dotcom bust and the global financial crisis. Son is now an influential investment partner of Saudi Arabia’s Public Investment Fund.
Along the way, Mansueto earned a considerable personal fortune, and joined the “super investor” club in 2010 when he joined Bill Gates and Warren Buffet in the Giving Pledge, promising to give away half his wealth to philanthropic causes. That is the essence of long-term thinking, and it permeates Morningstar and Kapoor’s strategic outlook.
“We like to focus on the long-term opportunity. The geopolitics is all short-term noise,” he said.
---------------
BORN
1975, India
EDUCATION
• Kodaikanal International High School • Monmouth College, Illinois, US
• University of Chicago, Booth School of Business
CAREER
At Morningstar since 1997, becoming CEO in 2017
---------------
The geopolitics of the Middle East and its issues of security, commodity dependency and economic volatility have always been a challenge to international investors looking to exploit the region’s undoubted opportunities.
“Maybe there is short-term volatility, but we encourage investors to be long term. The investing culture has to develop further in the region, and people should realize that volatility can be a non-event if you’re thinking long term,” Kapoor said.
There is no doubt the Middle East, as part of the wider investment world, has short-term challenges. Volatility in the price of oil — still the region’s most important economic indicator regardless of long-term strategies of economic diversification — means that asset valuations and capital markets are stubbornly reliant on the price of a barrel of crude.
At the same time, regional tensions — in Iran, Qatar and Yemen — are also impediments to attracting the big money flows from global investing institutions.
Kapoor thinks these challenges should not deter like-minded, long-term strategists. From the DIFC hub, Morningstar is looking at a careful expansion in the Middle East. It already serves the UAE capital Abu Dhabi from there, and has had some success in the Kuwaiti market, he said. But the opportunities of Saudi Arabia are looming large for the firm.
“Saudi Arabia is such a large presence in the region, such a large piece of the overall pie … We’re thinking of how we partner in Saudi Arabia and how we have a bigger presence there. The effect of Vision 2030 on people and the investing community is something that would help the markets mature there, and we are in support of that, for sure,” he said.
Global investors have been blowing hot and cold on the Saudi market for much of the year. While the main stock market index, the Tadawul, was among the best-performing in the world in the first half, it has lost some of that shine since, mainly as a result of uncertainties in the oil price and other concerns.
But it is still ahead on the year, proving the positive benefits of inclusion in the emerging markets category of investment rankings by several of the leading index compilers. Kapoor believes that is the way global investment trends are going.
“I think there are only a handful of stocks in the world that are really what you would call five star, and increasingly we’re beginning to look away from the US toward emerging markets for these kind of stocks. On a relative basis we are tilting toward a non-US focus. Other markets are more attractive and this means the emerging markets in particular,” he said.
But, regardless of the attractions of the fast-growing emerging markets of the East, if there was a global downturn in asset prices, the whole world, including the Middle East, would suffer. Some experts believe global stock markets are near the end of a 10-year record of growth, and predict a “bear” market ahead.
Recent weaknesses in the highly valued technology sector, worries about the increasing cost of capital and rising interest rates, and fears over the state of the world economy, especially the effects of a trade war between the two biggest economies, the US and China, have spooked many global investors.
So, is the world on the brink of a bear market?
“I wish I had a crystal ball. We think about prospects through the lens of future valuation. Markets have been strong over the past decade and it is a rational assumption that the returns of the past 10 years will not be replicated over the next,” Kapoor said.
He does not believe macroeconomic considerations are necessarily the most important factors in deciding investment priorities.
“Macro and valuations are separate things from my perspective. It is very difficult to successfully predict macro factors and most investors are best served by not trying to let those determine how they invest. As for valuations, they are certainly better than they were a month ago, but from a historical perspective, also not among the lowest. This would suggest a lower return environment going forward,” he said.
Apart from falling valuations, Kapoor sees several other risks to global markets — inflated investor expectations, rising interest rates, and the absence next year of the one-off boost to markets from President Trump’s tax cuts, which boosted American and world markets for the first half of 2018.
The state of the debt markets is another concern. “When the financial markets make debt easily available, that is a sign that the bull run is long in the tooth,” he said.
Investment assets tend to find their own level of equilibrium over the long term, and after a long period of using indices, many investment analysts believe the world will be a tougher place in the next few years.
Kapoor appears to agree. “Markets tend to always revert to the mean, and I would not be surprised if we were near that happening now,” he said, adding that this does not necessarily mean a market collapse. “It does not have to be a crash. Markets can just stay where there are for a prolonged period.”
But it is unlikely a period of market ambivalence would distract Kapoor and Morningstar from their mission, and could even present investment opportunities. “We are trying to help investors earn good returns over the long term — helping them to build their portfolios for the long term, rather than getting distracted by the noise,” he said.
And he takes inspiration from another master of the long view, the legendary founder of US investment giant Berkshire Hathaway. “I often think of the words of Warren Buffett — that you have to be fearful when others are greedy and greedy when others are fearful,” he said.
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