Morningstar Pulls Out All the Stops

The fund-tracker is adding services--and playing catch-up

In 1984, Joe Mansueto started a mutual-fund tracking service from the living room of his apartment in Chicago's Lincoln Park. Morningstar Inc.'s reports and five-star ratings quickly became the seal of approval for fund investors and their advisors. Morningstar today follows 13,545 funds in a $7 trillion industry. But the days of entrepreneurial growth are coming to an end.

Morningstar now faces challenges that were unimaginable a few years ago. Rivals are aggressively moving in with sophisticated tools that use more up-to-date stock and bond holdings. Competitors' reports are written by investment veterans, rather than the literature majors and former marketing pros used at Morningstar. Even worse, the company's proprietary database has been relegated to commodity status. Planners like George Paquin of Chelmsford, Mass., refuses to pay the annual $1,000 for Morningstar's Principia, a fund database on CD-ROM, since he can get what he wants for free on the Internet. "I don't think you need to examine 100 million funds," says Paquin, who uses the likes of for fund research. "For me, Morningstar's utility has diminished."

EXPANDED OFFERINGS. With Morningstar under fire, Mansueto emerged from almost three years in semiretirement last November to get his company back on track. Profitable until 1998, it has lost money since then, partly from overspending on dot-com marketing, but expects to break even this year. The 45-year-old has unleashed advisory services and portfolio analysis products, expanded the resale of data, and is spending millions to launch a host of international Web sites to research and analyze mutual funds abroad, an investment he doesn't expect to recoup for several years. Two years ago, the company started rating individual stocks. "Morningstar proves that research cannot pay for itself, and as it gets to be bigger it needs another source of earnings," says A. Michael Lipper, who founded Lipper Inc. mutual-fund database, now owned by Reuters Group PLC. (RTRSY ).

Morningstar's competitors include Lipper, Weiss Ratings Inc., and Standard & Poor's, like BusinessWeek part of The McGraw-Hill Companies. Weiss launched a rating service for equity funds in late 1998 and added bond and money-market funds late last year. The service--which originally rated banks and insurance companies--is going after do-it-yourself investors, and offers reports on the Web.

FRESH FACTS. Some fund-trackers are breaking new ground--Morningstar's original forte. For example, Vestek Select, a unit of Primark Corp., catered exclusively to pension consultants and institutional money managers until recently. It now additionally focuses on brokers and their clients, says Vestek's marketing director, Susan J. Lundquist. Vestek's edge is providing monthly portfolio holdings data and analysis--unlike Morningstar, whose portfolio data can be up to six months old. Fund firms such as Janus, PIMCO, and American Century swear Vestek to secrecy and bind them to release analysis only--not the raw data--to specific distributors. "The need for this was driven by the investment consulting community," says Keith P. Webster, managing director of Vestek. "They love this stuff."

Mansueto is not taking all this competition lying down. He is pushing Morningstar into money management, snagging Arthur J. Lutschaunig from Fidelity Investments to head up that effort. Starting this winter, he expects to pitch the service via financial advisers. With minimum investments of $100,000, Morningstar will charge a management fee of 0.35% of assets, less for larger portfolios.

A bold move. But Morningstar must avoid conflicts of interest between its management and ratings business. And the investment management arena is already pretty crowded. "Morningstar is trying to get into a marketplace that has too many players fighting for too little business at a time when people are in no mood to invest," argues Burton J. Greenwald, of mutual-fund consultant BJ Greenwald & Associates in Philadelphia. Still, Mansueto is excited. "This is the next step in Morningstar's evolution," he says.

Indeed. And as he strives to cope with ever-growing challenges, Mansueto will have to tap into the entrepreneurial spirit that fired him up 17 years ago.

By Pallavi Gogoi in Chicago, with Mara Der Hovanesian in New York

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