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UBS Hopes Morningstar' Will Sell

When UBS Global Asset Management of New York agreed to license Chicago-based Morningstar's new family of style-based stock indexes as the basis for new U.S. and European exchange-traded funds, the investment manager bought more than a new type of index. They bought the Morningstar name.

UBS is just the latest of many asset management firms to base products on well-known indexes.

Morningstar next month will launch the indexes, based on its proprietary style boxes, as tools for portfolio construction and performance measurement. More importantly, Morningstar is launching the indexes as the basis for mutual funds, ETFs and derivatives.

"Morningstar's reputation for sophisticated, independent investment analysis made it a logical choice for us," said UBS Managing Director Joseph La Corte in a statement. Neither La Corte nor any other UBS executive was available to elaborate on UBS' intentions at press time.

UBS is likely banking on investors' awareness of the Morningstar brand --and expecting that will help sell the products, said Eric Weiner, editor of The Independent Adviser for Vanguard Investors.

In fact, Don Phillips, managing director of Morningstar, said part of the reason Morningstar decided to launch the indexes was because firms asked for them.

The issue of investment management firms basing a fund on a well-known index came to the forefront when The Vanguard Group of Valley Forge, Pa., sought to add ETF share classes to several of its existing Standard and Poor's index funds. McGraw Hill, parent company of New York-based S&P, recognized the value of the S&P brand name and sued Vanguard. Vanguard lost the case and was not allowed to add ETF shares to its S&P products [see MFMN 11/12/01].

"Recognition of a brand name in a positive way can really help market a product. That's why Vanguard fought so hard to issue the S&P VIPERs (Vanguard Index Participation Equity Receipts)," Weiner said.

"Using S&P's name or the name of an S&P index in a product has many advantages," said S&P index licensing specialist Sandy Weinberger Schuma. "For the asset management company, S&P is a well-known brand name that is extremely well respected and offers instant recognition."

In fact, having the S&P name was so important for those products that Vanguard has been fairly inactive in bringing out ETF share classes since losing the court case. The firm has created only two based on the Wilshire 5000 Index and Wilshire 4500 Completion Index.

Standard and Poor's charges investment firms a minimum annual fee to license an S&P index, according to Schuma. The fee includes a basis point structure on assets in the fund. Morningstar would not comment on its fee structure.