Morningstar's shining success
Mix of investment data, independent research powers its growth story
Bonanza opportunities are all about spotting unfilled needs. Almost a quarter century ago, a young analyst at Chicago's Harris Associates had a burning frustration over the lack of transparency in the daunting jungle of mutual fund and adviser performance. He turned that itch into initiative and changed the investment management world into a very clear goldfish bowl. In doing so, he built an information empire worth $2.8 billion, and over half of it is his.
"I had become a fanatical believer in the power of mutual funds, but we were all wandering in the dark," recalls Joe Mansueto, founder and CEO of Morningstar Inc. (Nasdaq: MORN). "In 1984, in a search for any guidance on fund performance to help my clients, I began writing for advice to the smartest people in our field, like John Templeton. Before long, their responses began to pile up on my dining room table -- a wide variety of evaluation and outlook opinion. Funds were proliferating in those early days and there was no organized system to compare them. I decided to create one -- The Mutual Fund Sourcebook. It was a quarterly publication containing performance data, portfolio holdings and other info on over 400 funds.."
(Brian Jackson/Sun-Times)
The success of that compendium was the launching pad for Morningstar, an information and advisory service that today serves 5.2 million individual investors, 210,000 financial advisers and 1,700 institutional clients worldwide. It is one of the largest paid-premium sites on the Web, with more than 180,000 subscribers. It provides current data on 260,000 investment offerings, including performance ratings on more than 20,000 U.S. mutual funds and 88,000 foreign ones, 7,300 separate accounts, 1,300 closed-end funds and 80 college savings plans. It also tracks more than 13,000 stocks of U.S., Canadian and European public companies -- somewhat more than rival Standard & Poor's.
What gave added impetus to Morningstar's recent growth was the rising value placed on sheer independence of judgment within the investment community, which was badly tarred by a series of conflict-of-interest scandals. When the Securities and Exchange Commission reached its historic settlement with the top 10 brokerages and mandated that they each must rely on independent research sources, Morningstar was named by six of the 10.
Mansueto bet heavily on building a force of investment analysts that today -- at 182 strong -- ranks as one of the world's largest. This enabled him to launch services that didn't just dish data but evaluation. This has included full research coverage on more than 2,000 stocks. More recently, Morningstar began tracking 1,200 exchange traded funds, rating 200 of them, and 7,700 hedge funds. Meanwhile, its own investment counseling division now manages $100 billion in assets.
Mansueto sees an even larger role for Morningstar as not only a data source, a "Consumer Reports" for money management, and an asset manager, but as the investor's advocate and arbiter. "While we made great strides in bringing clarity to a murky sector," he says, "much of it is still opaque. We hope to convince the hedge funds to have uniform audits, and soon we hope to penetrate the private investment counseling industry." For openers, he has already won the confidence of 250,000 of the nation's 800,000 advisers, who now use Morningstar's Advisor Work Station as the dominant platform for Internet solutions in that business.
Just back from a global gab fest at Cancun with Morningstar people from 18 nations, Mansueto is as irrepressible as when I last interviewed him, four years ago. He's enthused about untapped needs still begging. One is the fixed income investment management market -- the rating of databases, analysis of credit and risks. Another is the uncharted parts of the world: stocks of developing nations, untouched by him or any other information service.
His own investors seem to share that spirit. His stock is at a 40 times earnings multiple, vs. five times for his other public comparable, Thomson Corp. The street sees him reaching a record $1.99 earnings per share this year vs. $1.53 last year, on revenues of $542 million, a nice jump from $436 million last year. This is all despite the grim stats that Joe's data factory will have to spit out about most everybody else in the months to come.
Ted Pincus is an adjunct professor at DePaul University and managing partner of Stevens Gould Pincus, merger and management consultants.
