Morningstar Inc.

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Morningstar Inc.

225 West Wacker Drive
Chicago, Illinois 60606
U.S.A.
Telephone: (312) 696-6000
Toll Free: (800) 735-0700
Fax: (312) 696-6001
Web site: http://www.morningstar.com

Private Company
Incorporated: 1984
Employees: 830
Sales: $139.5 million (2003)
NAIC: 511120 Periodical Publishers; 511210 Software Publishers; 516110 Internet Publishing and Broadcasting

Based in Chicago, Morningstar Inc. provides a wide range of independent investment research to more than three million individual investors, some 100,000 financial advisors, and 500 institutional investors, including banks, brokerage firms, insurance companies, mutual fund companies, and retirement plan providers, in 16 countries. The company's information products cover approximately 100,000 different investment options and are distributed in a variety of print and electronic formats, including CD-ROM, software applications, and the Internet. According to Morningstar, its reports provide coverage of closed-end funds, college savings plans, exchange-traded funds, mutual funds, separate accounts, stocks, and variable annuities. In addition, the company offers asset management, indexes, investment consulting, and retirement planning services.

Start-Up Success in the Mid-1980s

As with many successful companies, Morningstar is the product of one individual's idea. Joseph Mansueto, the son of an Indiana physician, developed the desire to start his own company while pursuing an MBA at the University of Chicago. His interest in securities analysis was formed after reading about legendary investor Warren Buffett in John Train's book, The Money Masters.

In the June 1, 1998, issue of Crain's Chicago Business, Mansueto explained: "I went back and read all the Berkshire Hathaway annual reports and got very interested in securities analysis. I would look at all the Buffett holdings throughout the '70s and try and figure out why he purchased certain companies, why he found them attractive. Sparked by Buffett, I started contacting other talented fund managers, and I began collecting all these shareholder reports. And once I had all of these annual reports scattered across my kitchen table, I thought it would be neat to try to compile all of this into one book, to see how outstanding investors thought and what kind of stocks they invested in."

After graduating with his MBA in 1980, Mansueto and college roommate Kurt Hanson started a market research firm that served the radio industry. Mansueto later went to work for the Chicago venture capital firm Golder Thoma, where his responsibilities included applying for cellular licenses. His next job was a stint with the investment firm Harris Associates.

In April 1984, Mansueto left Harris at the age of 27 to establish Mutual Fund Sourcebook Inc. from his one-bedroom apartment in Chicago's Lincoln Park. He used $70,000 of his own money from savings and stock sales to compile and publish The Mutual Fund Sourcebook, a quarterly mutual fund survey for individual investors. The 500-page survey, which sold for $32.50, contained complete portfolios for 400 mutual funds. Mansueto initially printed 800 copies of the survey, which then resembled a photocopied computer printout.

In the same Crain's Chicago Business article, Mansueto recalled the days when Morningstar was a fledgling start-up: "I just put all the furniture from the living room into the bedroom, bought some cheap tabletops, some PCs and started going. I wrote to all the fund companies and asked them for their literature. I wrote programs to manage data and had help key-punching in portfolios.

"Fortunately, technology helped me out. The IBM PC had been introduced, and it made it affordable for someone without a lot of capital to get into a business like this. Ten years earlier, it would have been a lot more costly. In fact, I spent a couple of months researching computer platforms. It sounds crazy today, but then I thought I would have to do timesharing on a mainframe or lease mid-range IBM or DEC computers."

Mansueto's enterprise received a big boost after he shelled out $6,000 for a large advertisement in the investment magazine Barron's. The ad resulted in 600 orders worth $78,000. First-year sales reached $100,000, and doubled to $200,000 in 1985, when the company unveiled its Star Rating system for mutual funds.

In 1986 Mansueto loaned $200,000 of his own money—and a similar amount from his father—to Morningstar, which used the capital to launch a fortnightly publication called Mutual Fund Values (later re-titled Morningstar Mutual Funds ).

That year, Mansueto chose a more flexible name for his company, changing it to Morningstar Inc. after the ending of Henry David Thoreau's Walden. In the June 1, 1998, issue of Crain's Chicago Business, Mansueto explained that he was first influenced by the author's themes of independence, thrift, and self-reliance as a college student, and that they remained important to him during his business career: "I thought those were good qualities for a company to embody. And I still remembered that last line of Walden: 'The sun is but a morning star.' "

Morningstar evolved rapidly during the 1990s, introducing a host of new offerings. This was especially evident during the first half of the decade. In 1991 a new bi-weekly publication called Morningstar Mutual Funds was introduced, providing coverage of 1,700 mutual funds. That year, the company also unveiled its first CD-ROM-based product. Called Mutual Funds OnDisc, the software was later renamed Morningstar Principia. The 5-Star Investor, which eventually became Morningstar FundInvestor, came in 1992. The Morningstar Mutual Fund 500, an annual publication summarizing 500 carefully selected funds, was unveiled in 1993. Morningstar's 1994 acquisition of MarketBase added stock coverage to its offerings. The following year, Mutual Fund Documents OnDisc, a set of 30 CD-ROMs with 14 gigabytes of data for researchers and institutional investors, was introduced. The product included annual and semi-annual reports, prospectuses, and other Morningstar reports.

After reducing its work force by 5 percent and scaling back some offerings in 1996, Morningstar migrated to the World Wide Web. The development of Morningstar.net in 1997 ushered in a new era in the company's history, in which the Web played a key role in content distribution.

International Expansion in the Late 1990s

Several important developments occurred in 1998. In January the company announced a joint venture with Tokyo's Softbank Corporation that resulted in the formation of Morningstar Japan K.K. In the wake of deregulation it became possible for Japanese banks to sell mutual funds at retail, and Japanese consumers gained the ability to directly hold foreign assets. The new venture was established to provide existing Morningstar products, as well as new offerings, to a new segment of Japanese investors.

Donald Phillips also was named as Morningstar's CEO in 1998. Phillips had joined the company as its first analyst in 1986, after answering an ad in the Chicago Tribune. In his first job at Morningstar Phillips provided coverage of 111 different mutual funds every two weeks. By 1992 he had been promoted to publisher of Morningstar Mutual Funds, with a 70-person staff that included 12 analysts.

In March 1998, Timothy K. Armour was named Morningstar's chief operating officer. Prior to joining the company, Armour was president of Stein Roe Mutual Funds. His career also included work as senior vice president and director of marketing for Citibank's Chicago office, along with stints in product management and strategic planning for General Foods Corporation.

A monthly individual investment newsletter called Morningstar StockInvestor was introduced in April 1998, with the aim of helping personal investors identify and analyze undervalued stocks. The company also introduced a premium membership service on Morningstar.net. For a monthly fee of $9.95, investors were able to access analyses of 500 mutual funds, as well as the leading 25 portfolio holdings for funds, historical stock prices, and more. By October, the entire Morningstar.net site included 250,000 registered users, with 12,000 new users added monthly. The Web site, which was praised by leading financial publications and included free fund news and portfolio analyses information, was redesigned the following year and renamed Morningstar.com.

By 1999 Morningstar was quickly becoming an international company. That year, Softbank Corp.—the company's partner in the Morningstar Japan venture—secured a 20 percent stake in Morningstar. This came in the form of a $91 million investment that provided Morningstar with capital to expand its Internet business, which already provided financial content to the likes of AOL, Bloomberg, Intuit, Microsoft, and Netscape. The move was a departure from Mansueto's strategy of growing the business exclusively from the company's own pool of cash.

In 1999 Morningstar also expanded into Canada and opened offices in New Zealand and Australia. An arrangement with FPG Research allowed the company to provide information in the latter two countries. Morningstar ended the 1990s with the introduction of Morningstar Stock Grades.

Armour assumed the role of president in 1999, and the company restructured a number of executive responsibilities. This included Armour taking control of publication marketing, which the company wanted to better separate from its editorial division. Armour also was tasked with building relationships with financial advisors. In part, this was accomplished by developing a Web version of Morningstar's financial planning software, Principia.

Company Perspectives:

Whether investors, advisors, or institutions are using our services, our goal is to produce high quality, well-designed offerings that help improve the overall investing experience. Since Morningstar was founded more than 20 years ago, we've continued to evolve and expand our products, and we remain committed to leading the industry in delivering world-class investment research and services to people around the globe.

With the dawning of the new millennium, Morningstar continued to increase its international scope with the establishment of Morningstar Asia, Morningstar Europe, and Morningstar Korea. Morningstar Japan also made its initial public offering in 2000 on NASDAQ-Japan. The formation of Morningstar Norge AS—a joint venture involving Storebrand subsidiary Finans-banken and Morningstar Europe—filled an information void in Norway, where data on mutual funds was hard to come by. In addition, the company's content was carried by Finland's leading business daily newspaper.

New product offerings also continued to appear. In 2000 a service for the 401(k) market called Morningstar ClearFuture provided online investment education, guidance, research, and advice to plan participants. In addition, investment advisors were offered their own Web portal called MorningstarAdvisor.com that included both free and subscription-based content. In addition to offering information from Morningstar, the new portal was designed to facilitate direct communication between advisors themselves, and between advisors, fund companies, and institutions.

Focused on the Future

Morningstar ended 2000 by reorganizing its company structure into seven decentralized business units. In doing so, the company sought to increase accountability and more closely measure revenues and profits in the wake of the NASDAQ plunge. In a move that some saw as controversial, 44-year-old founder and chairman Joe Mansueto took the CEO reins back from Don Phillips. Along with Tim Armour and Tom Florence, Phillips was named one of three managing directors. Tao Huang, a Chinese native who had joined Morningstar in 1990 to develop its CD-ROM products, was named chief operating officer. In the December 18, 2000, issue of Mutual Fund Market News, Mansueto cited his desire to put Morningstar on the fast track to profitability by reducing expenses. This included cutting the marketing budget for Morningstar.com, which had amassed some 80,000 registered users.

New offerings in 2001 included an online institutional research platform called DataLab, along with the Morningstar Rating for stocks. Two services for financial advisors also were unveiled in 2001. These included a Web-based investment planning offering called Morningstar Advisor Workstation, as well as a fee-based investment management service named Morningstar Managed Portfolio.

Don Phillips saw Morningstar Managed Portfolio—which was available only through the professional financial community and not to individual investors—as a natural progression for the company. Nevertheless, it angered some within the investment community, who argued that Morningstar was infringing upon their turf by pursuing the same clients. In the September 3, 2001, issue of Crain's Chicago Business, Rick Miller wrote: "Many financial advisors, likely to be major targets of Morningstar Managed Portfolios' marketing, are looking askance at the research company's new direction, citing concerns about competition and the potential damage to Morningstar's objectivity in fund analysis."

By 2001 Morningstar had firmly established its international presence, with Web sites for investors in Australia, Canada, Denmark, Finland, France, Germany, Hong Kong, Italy, the Netherlands, Norway, Spain, Sweden, and the United Kingdom. At the year's end, Morningstar had reduced its domestic work force by 14 percent, to 525 employees, while its overseas employee base had skyrocketed 50 percent, to 300 employees. Morningstar's annual revenues reached $91.2 million in 2001.

In 2002 Morningstar enhanced its Star Rating system. As opposed to using four broad asset classes to rank and rate funds, the new approach used 50 categories and took more factors into consideration. That year, Morningstar.com moved beyond 100,000 premium members, and the company first published Morningstar Stocks 500. The company's world-wide Internet presence was bolstered when MSN Money added Morningstar data to nine of its international sites.

Other new offerings in 2002 included the Morningstar 529 Advisor, which helped financial advisors select the best college savings plans, as well as a retirement advice initiative involving Morningstar Associates and Nationwide Retirement Solutions.

In 2003 Morningstar's revenues reached $139.5 million, up from $109.6 million in 2002. That year, the company's acquisition of mPower, a privately held investment advisory firm located in San Francisco, increased the base of retirement plan participants to whom it provided online advice. Following the acquisition, Morningstar served 9.1 million participants, up from 7.5 million.

Other developments in 2003 included the expansion of Morningstar's equity research staff, improvements to the company's system for classifying mutual funds, the publication of The Morningstar Guide to Mutual Funds: 5-Star Strategies for Success, and the introduction of new offerings such as Morningstar Managed Retirement Portfolios and the Morningstar Advice Statement.

Confirming what some observers had anticipated for several years, in May 2004 Morningstar prepared for an initial public offering (IPO) of its stock by filing a registration statement with the U.S. Securities and Exchange Commission (SEC). The company indicated that its IPO would hopefully generate $100 million.

Key Dates:

1984:: Joseph Mansueto leaves Harris Associates to establish Mutual Fund Sourcebook Inc. and publish the Mutual Fund Sourcebook.
1986:: The company changes its name to Morningstar Inc.
1991:: The company unveils Mutual Funds OnDisc, its first CD-ROM product.
1997:: Morningstar migrates to the World Wide Web with its first Web site, Morningstar.net.
1998:: A joint venture with Tokyo's Softbank results in the formation of Morningstar Japan K.K.
2000:: The company establishes Morningstar Asia, Morningstar Europe, Morningstar Korea, and Morningstar Norge AS.
2004:: The company prepares for an initial public offering of its stock.

At the time of Morningstar's IPO announcement, the company indicated that stock analysis for the institutional investment community would be a major source of future growth. Helping matters was the $1.4 billion Global Research Settlement between the SEC and 10 leading securities firms that were charged with issuing biased reports to investors. As part of the settlement, $432.5 million was earmarked for the securities firms to purchase independent research and provide it to their customers over a five-year period. Following the settlement, Morningstar was tapped to provide investment research to Citigroup's Smith Barney, Goldman Sachs, J.P. Morgan Chase, Merrill Lynch & Co., and Piper Jaffray.

In August 2004 Morningstar announced a new ranking system that pertained to the governance of mutual funds. The system initially evaluated 500 funds on such subjective criteria as corporate culture, regulatory compliance, and the quality of an organization's board. It was designed for investors to use with other tools and rankings as part of their overall decision-making process.

Also of note in 2004 was Morningstar's development of a hedge fund database, the acquisition of Pensions & Investments' ePiper separate account database, and the Morningstar Rating for separately managed accounts. In addition, Morningstar published Pat Dorsey's book, The Five Rules for Successful Stock Investing. Twenty years after its humble start in a one-room Chicago apartment, Morningstar had firmly established itself as an information leader within the investment world.

Principal Subsidiaries

Morningstar U.S.A.; Morningstar Canada; Morningstar U.K.; Morningstar Spain; Morningstar Benelux; Morningstar Norway; Morningstar France; Morningstar Denmark; Morningstar Germany; Morningstar Italy; Morningstar Finland; Morningstar Asia (Hong Kong); Morningstar China; Morningstar Korea; Morningstar Japan; Morningstar Australia; Morningstar New Zealand.