In 10 years Morningstar Inc. has moved from the ranks of upstarts to become a leader in the business of providing investors with timely information about their mutual funds.
Rarely does a news article mention mutual funds without including a reference to Morningstar data or a quotation from one of the company’s young but knowledgeable denizens.
Since 1984 Morningstar has outgrown two offices-founder Joseph Mansueto’s one-bedroom apartment early on and, more recently, quarters in the Monadnock Building, which the company left to occupy four expansive floors at 225 W. Wacker Drive.
Now an undisputed leader in the mutual-fund information business, Morningstar hopes to play the upstart role again.
In the last year Morningstar has been quietly building an operation to provide information to investors about individual U.S. stocks, along the lines of its popular mutual-fund publications.
In doing so, Morningstar has chosen to invade turf long claimed by such venerable firms as Moody’s Investors Service, Standard & Poor’s and Value Line.
“They probably need a little shaking up; someone new coming along with some new ideas,” said Mansueto, 38. “It’s good for investors, and that’s the fun of the business.”
Mansueto and his group of about 380 mostly 20- and 30-something employees might find competition in this new field somewhat different than what he and Morningstar publisher Don Phillips encountered when they first began writing their investor-oriented reports.
At that time, Lipper Analytical Services in New York dominated the mutual-fund reporting game, with President Michael Lipper gearing his reports mostly to mutual-fund companies and institutional investors, not individuals.
But in the 1980s individual investors were beginning a mutual-fund buying binge that has taken the industry to an unprecedented $2.2 trillion or so in assets. Privately held Morningstar has been able to ride that surge in interest with its expanding array of printed and computer-based reports that evaluate, update and contrast the performance of individual funds and fund categories.
Morningstar’s revenues, starting from scratch 10 years ago, are estimated to reach $32 million this year, a company spokeswoman said.
In an interview, Mansueto said he is looking to expand Morningstar’s equity analysis beyond its existing coverage of foreign securities-American depositary receipts, which are securities of foreign companies that are traded on U.S. markets.
“The other major way people invest is in equities,” he said. “If we want to be a major financial-information company, which we do, we have to analyze equities.”
In September Morningstar announced its acquisition of MarketBase, a small Boston-based provider of data on stocks of 6,000 U.S. companies. The company culled information from Securities and Exchange Commission reports on publicly traded U.S. companies and created a database for an investor-friendly software program.
The acquisition of MarketBase for an undisclosed sum accelerated the process Morningstar had begun a year ago of building its own database about U.S. companies, Mansueto said.
Morningstar has renamed the product Morningstar U.S. Equities OnFloppy and has begun marketing it along with its more established mutual-fund products.
Mansueto terms the product “intuitive” for investors. It provides more than 200 points of information about each of 6,000 U.S. companies and allows an investor to select and sort potential investments using a variety of investment techniques, he said.
Subscriptions for the computer-based product range from a high of $995 to a low of $55 a year, depending on whether an investor wants weekly updates or a onetime-only package.
Eventually, Morningstar plans to offer a printed version of its stock analysis, similar to its mutual-fund newsletter.
“One of our underlying strategies is to create a small group of formats we really like-a biweekly publication, a monthly publication, CD-ROM. Over time (U.S. Equities OnFloppy) will not be the only way we offer the product. We’ll look to bring out different formats, including print,” Mansueto said.
The new product doesn’t yet include written commentaries from Morningstar analysts on a company’s prospects and problems that form a cornerstone of the company’s printed reports on mutual funds. The computer-based product appears to be strictly for those who like to crunch numbers.
Initiating a printed product with commentary will require more staff, he said. Mansueto said he didn’t want to tip off competitors to the company’s strategy by detailing its hiring plans.
“It depends on how quickly we want to do it, and if we start with coverage of 1,000 companies or all 6,000,” he said.
Not incidentally, Morningstar’s new digs-home to 380 staffers-have room and office furniture already installed, for a total of 500 employees. Mansueto notes that at the time the company moved into its new quarters, it was economical for the company to build out its new space fully and furnish it en masse.
Competitors are watching Morningstar’s efforts closely.
“We’re aware of Morningstar and we wish them well,” said Dennis Dobson, a spokesman for Value Line, publisher of the long-standing Value Line Investment Survey, which evaluates individual stocks, as well as the year-old Value Line Mutual Fund Survey.
Value Line, like many of Wall Street’s financial-information powerhouses, has been in business more than 50 years. Value Line’s survey of stocks boasts a circulation of 100,000.
Standard & Poor’s dates the start of its business to the Roaring ’20s. In the computerized ’90s, S&P staff transmits real-time data directly via computer to 65,000 brokers and financial planners around the world, according to an S&P spokesman.
Such competitors don’t appear to daunt Mansueto. He said he tries to help Morningstar’s staff focus on the quality of work it produces, not on competitors.
“We don’t run our business based on what our competitors are doing,” Mansueto said.
“We have to push the frontiers of our business,” he said. “The challenge I throw out to people is to make great products.”
Nevertheless, Mansueto couldn’t resist a small barb when asked about a sparring match that developed earlier this year between his company and Value Line shortly after the latter introduced its investor-oriented mutual-fund report, which the firm says has a circulation of about 10,000, or about 28 percent of Morningstar’s reported 35,000.
A Wall Street Journal article in March offered evidence that appeared to support an accusation by Morningstar editor John Rekenthaler that some of Value Line’s mutual-fund analysts had plagiarized Morningstar’s analyses.
Rekenthaler was angered by what he saw as too-frequent similarities in some Value Line reports with what had first appeared in Morningstar’s analyses.
Mansueto said, “It did appear they plagiarized our analysis. They were in a hurry to get up and running. I assume they’ve cleaned up their act.”
“It’s ridiculous,” said Value Line Mutual Fund Survey editor Stephen Savage. “Those charges were absolutely ludicrous” and a reflection of how Morningstar reacted to the first competition they had ever experienced, he said.
If anything, the heat displayed in this tiff demonstrates how the financial-information business has become more competitive, especially as a souring market appears to have curbed investors’ demand for such products.
“Our business has slowed this year,” Mansueto acknowledged, “after 10 years of strong growth. It began in April, and I attribute it to rising interest rates resulting in slowing fund sales. Anyone connected with the industry has experienced slow growth,” he said.
Morningstar’s existing sales have not been significantly affected by the introduction of Value Line’s mutual-fund survey, he said. But it has become tougher to lure new subscribers to Morningstar’s mutual-fund products, he admitted.
“For new subscribers, Value Line is out there spending money on marketing,” he said. “I would guess we have to fight a little harder for new subscribers.”
