Traders on the floor at the New York Stock Exchange have been buzzing with interest following the recent announcement from Morningstar about a groundbreaking new index. The investment research firm has unveiled the Morningstar PitchBook US Modern Market 100 Index, a pioneering benchmark designed to reflect the growing trend of investors seeking exposure to both private and public equity markets.
The Modern Market 100 is unique because it combines publicly traded companies with privately held ones, consisting of 90 public firms and 10 venture-backed companies. This 90/10 ratio aims to encapsulate what Morningstar describes as the “modern asset universe,” a realm where opportunities in private markets are expanding. Notable private companies such as OpenAI and Stripe illustrate this shift, as they have been able to raise significant capital while remaining private, prompting industry experts to advocate for a broader understanding of market dynamics.
According to Sanjay Arya, head of innovation for Morningstar’s index products, the reluctance of companies to go public can be attributed to the ample capital available in private markets. “Companies don’t feel the urge to go public because they can raise a lot of capital,” Arya stated. He emphasized that neglecting private firms is a missed opportunity, especially given that many are among the fastest-growing in the economy.
Despite the evident growth in private equity, the public stock market remains significantly larger, valued at approximately $60 trillion compared to an $8 trillion private equity sector. However, Arya posited that private companies may offer insights into future economic trends. “The indexes are supposed to give you an indication about what the economy is, or the market sentiment is… and you can’t do that on public markets alone if a big chunk of it is outside public markets,” he added.
The landscape for alternative assets may shift even further, particularly following the executive order signed by President Trump in August, which facilitates the inclusion of alternative assets in 401(k) retirement accounts. This change marks a notable step forward in the ongoing trend of investors seeking private market opportunities.
Morningstar has observed a steady increase in private asset exposure in recent years. Since 2021, crossover investors—including sovereign wealth funds and hedge funds—have participated in around 5,000 private market transactions worth $450 billion. Arya aims for the Modern Market 100 to serve as a benchmark for performance across these two distinct asset classes.
However, the creation of the index has its challenges. Arya noted that the development process, which began about four years ago, required establishing a rules-based framework to accurately price private securities. The team utilized secondary trading platforms like Caplight and Zanbato to gather pricing data, implementing liquidity screens, quarterly rebalancing, and daily calculations to ensure reliability.
Though the index is structured to include large-cap companies—predominantly high-tech firms—it carries more risk. The top public companies featured in the index include giants like Microsoft, Nvidia, and Apple, while its private constituents feature innovative entities such as SpaceX and OpenAI. This concentration presents the possibility for greater returns, yet it also introduces vulnerability, especially in an environment where tech stocks face scrutiny over their high valuations.
The Modern Market 100 index reported a remarkable 1-year return of 28.2%, outperforming the S&P 500, which saw a 20% increase in the same period. Arya highlighted that the index allows investors to tap into opportunities that major benchmarks might overlook, emphasizing the significance of companies like OpenAI, valued at approximately $500 billion yet underrepresented in many investment portfolios.
He concluded that evolving benchmarks are crucial for capturing the nuances of economic growth. Just as the Dow Jones Industrial Average originally showcased railroad companies in the late 1800s, today’s benchmarks must reflect the innovations defining the current and future economy. Arya believes that enhancing investor understanding of these shifts can provide vital insights for navigating the modern financial landscape.
