Continuing Partnership with Morningstar, Inc. to Transform Portfolio Optimization



By Casey Moffitt
Yong Zheng

Yong Zheng, assistant professor of information technology and management at Illinois Institute of Technology, has earned a grant from Morningstar, Inc. to develop a visualization tool that will help the Chicago-based financial technology outfit’s clients make informed decisions about their investment portfolios.

Zheng’s goal is to build an interactive visualization platform that will allow Morningstar clients to interact with a user interface and visualize the pros and cons of portfolio options. This tool will ensure that clients are aware of the impacts on their assets based on risk/returns changes and environmental, social, and governance (ESG) scores, which outline investments that promote sustainable development and practices, such as concerns related to climate change, pollution, human rights, shareholder rights, and political contributions. This should result in more transparency and trust in Morningstar’s financial portfolios.

Zheng says the tool has two major functions.

“On one hand, clients can observe the characteristics of the financial portfolio through a comparison with a benchmark, such as a portfolio without ESG considerations or an existing portfolio from the current client,” he says “On the other hand, the platform will provide interactive components on a user interface which will allow clients to change inputs, such as client preferences on ESG factors, so that clients can change their preferences and locate their preferred portfolio through these interactions.”

Traditional portfolio optimization in investments have previously tried to maximize expected returns and minimize investment risks. In this project, Zheng seeks solutions by additionally considering the objectives that are associated with factors in ESG. This will allow investors to see if financial portfolios with high ESG scores have similar return/risk levels compared to traditional ones, and to make informed decisions on allocating their assets. Multi-objective optimization techniques are used to achieve the balance between return/risks and the ESG scores. These optimization solutions have been published in a flexible open-source library called MOPO-LSI. 

“The major challenge in this visualization platform is the inputs/outputs transition between user interface and the MOPO-LSI library we built for portfolio optimization,” Zheng says. “We need to display the outputs from the MOPO-LSI library to be shown on user interface components. And we also need to collect user inputs from the user interface and send them to the MOPO-LSI library.”

Zheng says he believes that Dash, a Python library used for creating web applications with interactive user interfaces, is the ideal solution to build these user interface components.

“(Dash) is designed to simplify the process of building web applications by providing a simple syntax and pre-built user interface components that can be easily customized and combined to create complex layouts,” Zheng says.

This is the second phase of a Morningstar grant that Zheng received in summer 2022. Last year Zheng and his research team collaborated with Morningstar to develop intelligent and effective solutions for financial portfolio optimization. A multi-objective optimization framework was built that considers expected returns, potential risks, and corresponding metrics in ESG standards. It was realized through algorithm development, coding, and evaluations.

“There were two major challenges involved,” Zheng says. “First, we needed to adapt the technique of multi-objective optimization to the contexts of financial investments. Before the project starts, everyone knows that multi-objective optimization is the solution for this type of the problems. However, we need to well represent the objectives and set up the objective problems specifically for this financial scenario. For this purpose, we have several communications and discussions with financial experts at Morningstar, Inc. in order to bring the financial knowledge/background and my skill sets together.”

Another challenge was related to the transparency of the portfolio solution to build trust with Morningstar clients, and how to encourage them to select financial portfolios with ESG considerations.  

“To solve this issue, we came up different metrics to deliver the comparison between a portfolio with and without ESG considerations,” Zheng says. “By this way, clients can observe that the new portfolio can help achieve similar returns/risks, while it can also improve biodiversity, reduce carbon emissions, pollution, labor standards violations, and so forth. Also, the upcoming visualization platform, funded by the new grant, is another solution to enhance transparency in these optimized financial portfolios.