Joe Mansueto appears a little nervous as he sits at the head of a boardroom-size table addressing about a dozen kids from Walter Payton College Preparatory High School.
He is on his home turf–the Loop headquarters of Morningstar Inc., the mutual fund rating company he founded 22 years ago–but Mansueto is sweating a little. He tells the teens he isn’t really comfortable with public speaking but it is something he intends to work on. He is a believer in the perfectibility of man, or at least himself. Mansueto lines up one speaking engagement a month to further his self-improvement program.
“To be successful, you’ve got to be patient and persevere. You have to listen to your own instincts, though at your age, it’s hard to have confidence in those,” he says.
A lack of self-confidence is one thing Mansueto has never had to worry about, say family and friends, and it’s led him to where he is now: CEO of a publicly traded company and a member of an even more elite group: the Billionaire Club. His 74 percent stake in Morningstar was worth about $1.3 billion last week.
Morningstar has become to mutual funds what Michelin is to restaurants–a tough critic and a trusted source. But staying put won’t be enough to satisfy Wall Street investors who are constantly looking for rapid growth. And there are persuasive arguments that Morningstar won’t easily be able to duplicate its success with mutual funds in new areas. The critical question is whether Mansueto can do it again.
“They own the ballpark. They’ve positioned themselves admirably as arbiters of what’s good and bad in the mutual fund industry. The hard part is what they do next. I think they’re really in a tough place,” says Michael Stolper a mutual fund industry expert in San Diego who has watched Morningstar’s evolution.
Stolper and others believe that if Morningstar is to grow, it must dive into the investment management business, creating its own mutual funds, a move that would put it in competition with the Vanguard and Fidelity funds it evaluates. Morningstar could easily create a fund made up of its five-star rated funds, and it would likely be a hit with investors. But such a move would certainly rock the staid mutual fund industry and it might even raise questions about Morningstar’s own objectivity–one of the company’s greatest assets.
Mansueto says there are no plans to start offering mutual funds for precisely that reason. “If we ever did consider such an idea we would have to grapple with the independence question. By offering your own funds and commenting on funds in general, it could potentially pose a conflict.”
Having gotten rich by following his own path, Mansueto isn’t at all concerned that Morningstar has reached its zenith.
He envisions applying Morningstar’s trademark five-star rating system to the estimated 8,000 hedge funds that have become the trendy place to invest for institutions and high net worth individuals.
Many hedge funds are highly secretive–some won’t even tell their clients what their money is invested in–and they are largely unregulated, but Mansueto sees an opening for Morningstar-style analysis. He believes that investors can force hedge fund operators to fork over more information, though he admits Morningstar doesn’t have much leverage at this point.
“It’s a very opaque industry. So we need to build up in a grass-roots fashion an audience for our hedge fund data. Investors can demand that hedge funds give us their data. They can say, `We’re not going to invest in you because you’re not in Morningstar’s database.’ We need to build up critical mass.”
Morningstar has 3,000 hedge funds in its database, has hired investment analysts to interview hedge fund managers and expects to roll out its qualitative research later this year.
In the business world, Mansueto is a rarity: an idealist who has succeeded without compromising his principles and a successful entrepreneur who has kept his ego in check. Even now, he sits in an unassuming ’90s-style cubicle like the rest of his roughly 850 employees at 225 W. Wacker Drive.
You’d never guess he was an investment magnate if you passed him on the street or caught him on his daily run along Chicago’s lakefront. Mansueto looks like a typical Midwestern guy in his 40s who favors khakis and crew-neck sweaters over open-collared shirts. His clean-cut dark hair is receding a little, but his face is young for his 49 years. His voice is a little on the high side. If he were a singer, he would probably be a tenor.
His mother, Sara Mansueto, says she doesn’t know where her son Joe got his entrepreneurial drive, but it was there from an early age.
“He was always involved in some kind of scheme. He loved to buy and sell,” she recalled. “He was very interested in shopping centers. When he was 10, he made me drive him to Evergreen Park to see the first under-cover shopping mall.”
The Mansuetos had four children, all of whom turned out differently–a son in Los Angeles is a lawyer and a daughter in London is a doctor. Another son died several years ago of West Nile virus. They were a close family but Sara Mansueto says she was far from overprotective.
“I tried not to interfere much with my kids. I let them be and make their own mistakes. I was there to help them pick up the pieces.” And Joe, she adds, “had a very strong sense of himself from the get-go. He went his own way. He wasn’t influenced so much by what other people did.”
As the oldest son of an affluent family in Munster, Ind.–his father was a doctor, his mother a nurse–he had the chance to pursue many interests. He played sports and got involved in ham radio. He was a voracious reader and was always placed a year ahead in math and science.
“I was a slightly geeky kid,” he concedes.
He cruised through Munster High School and ended up as a freshman at the University of Chicago, where his studious classmates spent Saturday nights hitting the books. “I thought, `This is very different from my high school. I had better work hard.'”
Fate paired him with Kurt Hanson from Wauwatosa, Wis., for a roommate. Like Mansueto, Hanson had the bug to make money, and soon the two were selling soda from their dorm room on the honor system.
It was no dinky operation. They bought two full-size refrigerators for their suite and contracted with beverage wholesalers for weekly deliveries of soda and snacks.
Both Hanson and Mansueto were fast-tracked into the University of Chicago’s MBA program, which meant their fourth year of college was their first year of business school.
The two took a year off after that and moved to Evanston, where Hanson sold suits and Mansueto tutored North Shore kids in math and took jazz guitar lessons.
When they returned to Hyde Park to finish their MBAs, Hanson and Mansueto would spend half days every weekend at coffee shops trying to decide what business they wanted to start.
“We went through a bunch of ideas. We thought about stores that would rent VCR tapes as movies,” Hanson recalls. “We rejected that as fanciful.”
They settled on the radio business and launched Strategic Media Research.
The entrepreneurs hit the phones, playing snatches of music for people and asking them to rate the songs on a 1-to-5 scale of “Do you love it or hate it?”
“We produced something akin to a Morningstar page on a song. So take `Peaceful Easy Feeling’ by the Eagles. There would be a bar chart of demographics, who liked it, who didn’t,” Mansueto said. “A program director would say, `Here’s my play list, test it. Here’s are some songs I’m thinking of playing. Test them.'”
The radio research firm found a niche and expanded around the country. But Mansueto didn’t want to spend his career in radio, so he sold his shares to Hanson and set out to decipher the world of investing.
Mansueto approached his new task with the same research-oriented, analytical approach. He studied the shareholder letters of legendary investor Warren Buffett. He wrote to big-name mutual fund managers for their quarterly reports so he could figure out what stocks they were buying.
“As I had all these reports on my dining room table, I thought, `Wouldn’t it be neat if someone compiled these into a compendium so I wouldn’t have to make these calls every three months? I marveled that I could buy the services of John Templeton to manage my assets for pennies on the dollar. Isn’t that a neat thing? I thought, `This is really the best way for most Americans to invest.'”
Mansueto didn’t immediately take his epiphany and run with it. In his methodical fashion, he decided to work in the investment business first to better understand it. He did a stint with Chicago private equity firm Golder Thoma, then jumped ship to Harris Associates, an investment management firm that invests Buffett-style.
What happened next is now part of Morningstar lore. Mansueto left his job in April 1984 and started Morningstar in the bedroom of his high-rise Lincoln Park apartment at the corner of Clark Street and Wrightwood Avenue. He ran a full-page ad in Barron’s for his mutual fund sourcebooks. Before the bill for the ad arrived, he sold 650 copies at $32.50, which gave him the cash to pay his printing bill. He had created a self-financing business–almost.
In fact, he invested $75,000 of his own money in Morningstar’s startup by cashing in savings bonds and recycling profits on other investments. In the first five years before Morningstar became cash-flow-positive, he invested $250,000 and his parents lent him another $250,000.
Morningstar’s revenue grew rapidly. Its $100,000 in first-year revenue grew to $10 million in 1992 and almost $40 million in 1997.
But the information world was changing and mailing out paper reports suddenly began to look old-fashioned as the Internet came to the fore. Mansueto also began to feel a little weighed down. Having a large number of people reporting to him swallowed up his schedule and didn’t leave him much time to ponder the future or think about investing.
Mansueto decided to step back a little from Morningstar. He became the company’s chairman and named Don Phillips, Morningstar’s first analyst and a trusted colleague, president in 1996 and CEO in 1998.
“I still loved Morningstar but I wanted to work in a different way,” he said. “I thought I would like to spend more time thinking about investing and thinking about technology.”
The new arrangement coincided with the decision to bring in an outside investor to fund the firm’s heavy investment in the Internet. He refers to it as “a period where we knowingly suspended our profitability.”
His hiatus lasted four years. The Internet bubble had burst, and Mansueto decided it was time to get back to some financial discipline. He took Phillips into a conference room in 2000 and told him that he was coming back as CEO.
“It was not a commentary on Don’s performance by any means. We were all part of the decision to lose money,” Mansueto said.
What happened next was more unusual than his return. Phillips stayed on and still works at Morningstar as a managing director in charge of corporate strategy.
Morningstar returned to profitability in 2003 and went public last May at $18.50 a share. The stock has more than doubled, to $44.47, helped by a strong first-quarter earnings report earlier this month.
Mansueto says his job as the CEO of a public company hasn’t changed much, and he doesn’t intend to become a slave to Wall Street. The firm doesn’t issue earnings forecasts and declines to meet with current or prospective shareholders.
Investors with a question for management are told to put it in writing. Morningstar responds monthly in a filing with the Securities and Exchange Commission that is posted on its corporate Web site. The irony of that isn’t lost on some industry players who note Morningstar’s empire was built on making mutual funds more transparent to ordinary investors.
Becoming incredibly wealthy hasn’t changed him much, his friends say. “He is still wearing clothes that he buys at the Gap,” says Hanson, who remains a close friend. “Maybe he has graduated to Banana Republic.”
Plenty of other things have changed. He married in 1998 and now has three children, a 5-year-old daughter, a 3-year-old son and the latest addition–an 8-month-old boy, which makes for “a lively household,” as Mansueto puts it.
“Joe is totally focused on his kids and his business,” said longtime friend Jeff Jarmuth, a Chicago hedge fund lawyer who was a few years behind Mansueto at U. of C. “Kurt and Joe and I used to go out to dinner once or twice a week. Once he had his kids, it became harder for us to do that.”
Mansueto’s idea of a fun vacation these days is driving the family to their second home in Three Oaks, Mich.
The lives of his close friends have changed too. About once a month, they get a call from a reporter asking them about Mansueto. “Kurt and I haven’t been nearly as successful as Joe, but God bless him, we love him,” Jarmuth said. “He deserves it.”
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schandler@tribune.com
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Joe Mansueto
Recent book read: “Hedgehogging,” by Barton Biggs
Favorite movie: “The Godfather” trilogy
Fun vacation activity: relax, make hamburgers and walk in woods in southwestern Michigan
Investing role model: Warren Buffett
Best stock pick: John Wiley & Sons (publishers)
Recent investment: spent $35 million to acquire Inc. and Fast Company magazines
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Morningstar Inc.
2005 revenue: $227 million
2005 net income: $31.1 million
IPO share price: $18.50
Current share price: $44.47
Market capitalization: $1.8 billion
CEO salary and bonus: $100,000
Source: SEC filings
