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Morningstar’s Ibbotson Unit Receives Patent on Its Portfolio Creation Technique Using the Concept of Human Capital
Friday, July 13, 2007
Chicago, IL -- Ibbotson Associates, a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. (Nasdaq: MORN), today announced that it has received a patent from the U.S. Patent Office (patent number 7,216,099) on its portfolio creation technique for individual investors based on the concept of human capital. Ibbotson uses this method to construct portfolios for many of the largest mutual fund and insurance companies as well as individual investors in its defined contribution advice and managed account programs. This is the second patent received by Ibbotson for its asset allocation techniques.
The method provides a model for portfolio construction based on balancing an investor's financial capital and human capital. Financial capital is defined as an investor's current savings, such as money already saved in a retirement account. Human capital is an investor's future potential savings, and is often the single largest asset an investor has. Typically, human capital is a bond-like asset-similar to regular interest payments from a bond, workers earn a weekly salary from which they accumulate savings. Younger investors have far more of this bond-like human capital than older investors because they have a long time horizon to earn and save. So to balance out that large allocation to human capital, for example, younger investors should hold their financial capital in more aggressive investments. Older investors, on the other hand, have less human capital and should guard their financial capital with a larger concentration in conservative investments.
The invention is a method for automatically establishing an investor's portfolio mix by taking into account the investor's human capital, financial capital, age, savings rate, and risk profile. It was developed by Peng Chen, Ph.D., CFA, president and chief investment officer of Ibbotson Associates; Roger Ibbotson, Ph.D., founder of Ibbotson Associates and professor of finance at Yale School of Management; and Mike Henkel, former president of Ibbotson Associates.
"Andre Agassi and I are the same age and we may even have the same risk tolerance, but that doesn't necessarily mean we should have the same asset allocation," Chen said. "An investor's tolerance for risk and age should not be the only factors that determine asset allocation in a portfolio. One's current financial situation and future earning ability-financial capital and human capital, respectively-play a large role."
Ibbotson Associates, a leading authority on asset allocation, was founded by Professor Roger Ibbotson in 1977. The company has been entrusted to create asset allocation models for many of the largest companies in the finance and investment industries. Morningstar acquired Ibbotson in March 2006. Ibbotson is now part of Morningstar's Institutional business segment, and is a leading provider of retirement advice and investment consulting services to institutions. As of March 31, 2007, Ibbotson had over $26 billion in assets under advisement in its investment consulting practice and over $9 billion in assets under management in its managed retirement accounts business.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in the United States and in major international markets. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutional clients. Morningstar provides data on more than 230,000 investment offerings, including stocks, mutual funds, and similar vehicles. The company has operations in 16 countries and minority ownership positions in companies based in three other countries.
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