Morningstar's Mansueto sees big opportunity with ByAllAccounts

In a Take Five interview, CEO says firm is also well-positioned in liquid alts space

Apr 4, 2014 @ 6:59 am

By Jeff Benjamin

morningstar, mansueto, byallaccounts, liquid alts, etfs, mutual funds, stewardship, acquisition, organic, data, aggregation
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Morningstar CEO Joe Mansueto

Morningstar Inc.'s $28 million acquisition of data aggregator ByAllAccounts Inc. is not the fresh start of a buying binge for the investment research and analysis conglomerate, but it is the start of expanded efforts to make the most of the various data and platforms at hand.

Joe Mansueto, the 57-year-old founder, chairman and chief executive of Morningstar, described the ByAllAccounts deal as stepping briefly outside the company's strategy of focusing more on organic growth.

“We've set a very high bar with regard to acquisitions,” he said. “We're not on the prowl for acquisitions.”

What Morningstar is on the prowl for is an ever-expanding footprint on the financial services industry landscape.

InvestmentNews: Why spend $28 million to acquire what is essentially a data aggregation business when it seems like the kind of business Morningstar could build on its own?

Mr. Mansueto: Yes, we could have built it and we are in the data aggregation business, but we really admired the deep expertise of ByAllAccounts. They eat, live and breathe account aggregation. These guys do it better than anybody, and they are far ahead of where we are. They are especially strong with alternative investments. So we believe we're further ahead by acquiring their capabilities.

(See also: Morningstar's ByAllAccounts deal could give it big edge with advisers)

InvestmentNews: What's the next evolution of Morningstar's data aggregation business going to look like?

Mr. Mansueto: There are a few things that will happen. We want to offer this capability to all of our customer segments. Beyond advisers, there are opportunities in retirement, individual and global platforms. It will proliferate throughout our capabilities.

We very much want to continue to enhance the growth of the stand-alone ByAllAccounts service, as well. This is a critical need advisers have to look more holistically at a client's financial situation.

InvestmentNews: Some hedge fund data firms are starting to track and benchmark the increasingly popular liquid alternative mutual fund space. Does that present any new challenges for a company like Morningstar, which is already tracking liquid alts?

Mr. Mansueto: I don't believe it does. We've shifted our focus to the manager and less on the vehicle, since we track all the different kinds of vehicles. If a competitor is coming in and looking at one vehicle, I'm not sure that's going to fully meet the needs of investors and what they're really looking for.

We also have analyst coverage of liquid alternatives; we're not just providing the data.

InvestmentNews: The exchange-traded fund industry is still just a fraction of the size of the mutual fund industry, but does the rapid pace of growth over the past decade represent any kind of threat to the way the mutual fund industry will have to compete and evolve in order to remain dominant?

Mr. Mansueto: I don't think so. I think the growth in the ETF industry represents the growth and popularity of passive investing; the so-called smart beta. The mutual fund industry is 10 times larger than the ETF industry, and I don't think ETF growth is a threat to the popularity of the mutual fund industry.

InvestmentNews: Morningstar has spent a lot of time and resources to build up its focus on fund stewardship, but how has that benefited investors?

Mr. Mansueto: We just released major stewardship study looking at firms that are good stewards of capital. Things like manager tenure, fee levels and managers' investing in their own funds. We found that those characteristics were good predictors of subsequent fund performance.

We've been looking at stewardship for a decade, and now we have enough data to quantify it and show that stewardship matters. It really confirmed our view that it's important to look at stewardship practices and how that affects performance.

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