Morningstar’s Mansueto broadening his horizons

No one can say that Joe Mansueto lacks ambition.

The chairman and chief executive of Morningstar Inc., the mutual fund tracker he took public in 2005, is in the midst of an acquisition spree and is well on his way to transforming Morningstar into an international powerhouse. He wants the firm eventually to derive 50% of its revenue from businesses outside the United States, compared with 30% today. Just last week, the firm’s European subsidiary, Morningstar Europe BV, said that it is increasing its stake in Morningstar Denmark A/S to 100%, from 25%.

If all that isn’t enough, Mr. Mansueto said that Morningstar will soon cover fixed-income securities, and eventually private-equity and venture capital offerings. In December, the company said that it was entering the credit ratings arena, starting with rating corporate bonds.

On the eve of Morningstar’s 22nd Investment Conference, which will be held in its hometown of Chicago this week, Mr. Mansueto said that growing internationally is a top priority for Morningstar, which has acquired 12 companies in the past 18 months.

So far, the company has a presence in 21 countries and has a particular interest in expanding into Latin America, perhaps Brazil, he said.

“If you go back 25 years ago, our goal was to address the single need for mutual fund research, but we have expanded to include research on closed-end funds, stocks, separate accounts, variable annuities, and we need to continue to expand to keep up with customers’ expectations,” Mr. Mansueto said.

Morningstar’s ambition has some observers worried that the firm is losing sight of an important customer base: financial advisers.

“Morningstar is starting to cater to a much wider audience, and while they are by no means skipping past the adviser, it seems that what they are delivering to advisers from a research standpoint is fairly light,” said Robert. A. Isbitts, chief investment officer of Emerald Asset Advisors LLC. “I have yet to run into an adviser who doesn’t agree with these sentiments.”

And with such aggressive growth plans, Morningstar runs the risk of allowing the quality of its research to slide, said Geoff Bobroff, a mutual fund consultant.

“The mutual fund industry is self-policing, so if Morningstar gets something wrong, [the industry is] quick to point it out to the firm,” Mr. Bobroff said. “In these newer markets, I am not sure that there is that reliance factor, so the quality of their data may be lacking.”

But Mr. Mansueto said, “There are still going to be millions of investors viewing our data, so I don’t see why that self-policing mechanism wouldn’t be there.”

Also, given Morningstar’s continued push to provide model portfolios and asset allocation guidance to mutual funds, broker-dealers and retirement plans, some advisers worry that the firm may start to compete with them.

“I know that they are doing more with advising on funds, and as long as they don’t start competing with us, I am OK,” said Douglas K. Flynn of Flynn Zito Capital Management LLC, which manages $240 million.

Morningstar does model portfolios for advisers who ask for it, Mr. Mansueto said. “We have no plans to compete with advisers,” he said.

Mr. Mansueto contends that Morningstar is maintaining its focus on serving advisers.

“The adviser audience is certainly one of the largest audiences we serve, and we are continuing to expand our offerings to them,” he said.

To that end, Morningstar this year will start offering advisers shorter summaries and bullet points of its fund research, Mr. Mansueto said.

“One of the things we have heard is that advisers are busy, and they don’t have a lot of time, so they want summaries and bullet points of the funds they own,” he said.

At the same time, Morningstar recognizes that different clients have different needs, Mr. Mansueto said. For example, he said, the gatekeepers at the broker-dealers want more research than ever before to help them monitor and update their preferred-funds lists.

“We are looking to do longer, more detailed reports for this group,” Mr. Mansueto said. “I think it’s inefficient for all of the broker-dealers to create large staffs of fund researchers if Morningstar could just build up our research capabilities to address those needs.”

By expanding its research to include fixed-income securities, Morningstar also thinks that it can further help advisers.

“We don’t have a database of fixed-income securities, and I think that would make our fund analysis more robust. Later this year, Morningstar will begin publishing fixed-income-research ideas and ultimately wants to issue “buy,” “sell” and “hold” calls on bond securities,” Mr. Mansueto said.

Morningstar would also like to be able to provide advisers with more information on how different retirement income products are structured and provide some transparency on the fees, he said.

“The fees are not comparable, and so it gets very complex easily,” Mr. Mansueto said. “That to me is a perfect Morningstar problem that we can solve by shining a light on the fees.”

Morningstar is discussing an expansion of its model portfolio offerings to assist advisers in devising retirement income plans. The firm provides customized target date portfolios through Ibbotson Associates Inc., which Morningstar bought in 2006, and its Morningstar Associates LLC subsidiary.

“We would like to do more with the customized glide paths for retirement plans,” Mr. Mansueto said, noting that the retirement income market is clearly growing, and Morningstar wants to be a big player in that market.

One analyst said that the firm has the strength and the clout to achieve much of what it plans to do.

“Morningstar should have gotten clobbered last year, given what happened in the investor community,” said Elliott Schlang, managing director and analyst at Great Lakes Review, part of Soleil Securities Group Inc.

In 2009, Morningstar’s net income was $82.5 million, or $1.66 a diluted share, down from $92.5 million, or $1.88 a share, in 2008.

So what keeps Mr. Mansueto awake at night?

“We have 2,700 people around the world, and you always wonder if everyone is doing their best to uphold the integrity of the work we do,” he said. “Our biggest asset is our reputation.”

E-mail Jessica Toonkel Marquez at [email protected].

Related Topics: ING Group, Morningstar Inc.