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October 17, 2006 

 Q&A: Morningstar Founder, CEO Joe Mansueto on Mutual Funds, Investing 10/17/2006
The mission of Going Global, which appears on MidwestBusiness.com on most Tuesdays, is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.

Morningstar's logo CHICAGO – Joe Mansueto founded Morningstar in 1984. He has served as chairman since the company’s inception and as CEO from inception to 1996 and from 2000 to today.

Before founding Morningstar, Mansueto was a securities analyst at Harris Associates. He holds a bachelor’s degree in business administration from the University of Chicago and a master’s degree in business administration from the University of Chicago Graduate School of Business.

In a three-part Q&A series, Mansueto sat down with international expert Michael Muth to discuss mutual funds, international investing and how Moringstar plays a role.

International Financial Market

MidwestBusiness.com: Please describe how does the rest of the world invests in mutual funds. What’s Morningstar’s role?
Joe Mansueto: Mutual funds are designed for the average individual. You don’t have to be a professional to invest in a mutual fund. You don’t have to delegate responsibility to a professional. Just as in the U.S., the same occurs overseas. There’s a robust market for mutual funds.

Mutual funds are an $18 trillion market: one-half in the U.S. ($9 trillion), and of the balance, 35 percent is in Europe and 10 percent to 15 percent is in Asia-Pacific and Africa. The big difference in how they’re sold and distributed is that these are self-directed investors who have a passion for doing the research and taking on the responsibility themselves. We don’t see that overseas. It’s more advisor and institution driven.

They go to their bank or financial advisor and rely on an institution for mutual fund selection. There’s less of a culture of the individual investor. They’re even greater delegators outside the U.S. We look at three segments: the individual investor, financial advisors and institutions. Overseas, we primarily work with financial advisors and institutions.

We hope to go directly to individual investors as that market develops. Overseas individual investors don’t subscribe to our services. We sell them through financial advisors. Whereas an individual might use our tools to evaluate mutual funds, overseas they depend on an advisor. We work with institutions and advisors and equip them with our analytical tools.

MM commentary: My personal impression is that buyers of mutual funds are not as broad and widespread in other countries as we are here in the U.S.

International Operations

MB: Which foreign markets and currencies do you cover?
JM: Our mission is to create great products that help investors reach their financial goals. Investors are located all around the world. Over time, we want to be everywhere investors are. We have a pretty broad footprint today. We have offices in 13 countries with joint ventures in three countries.

We’re in Europe, the United Kingdom, Germany, France, Spain, Italy, the Netherlands, Denmark, Norway, Canada, Japan, Korea, Hong Kong, mainland China in Shenzhen, Taiwan, Australia and New Zealand. We’re focused on where investors are investing in mutual funds. Foreign exchange is not an issue for us. Currencies will fluctuate and balance out over time. We’re more focused on investable assets.

Foreign currencies are hard to predict and to have an edge is difficult. We’re focused on the fundamentals. When you get into macro issues like GNP, GDP, exchange rates, interest rates and where they’re moving, we’re not sure anyone can do that reliably. We haven’t chosen that path.

MM commentary: While foreign exchange exposures are a risk that can be managed, they are managed at a cost.

MB: Which foreign customers do you serve and where?
JM: Our operations outside the U.S. represent about 10 percent to 15 percent of our total revenue. It’s still relatively small and spread across many countries. Europe is a big presence. We have a longer history in Canada, did a few acquisitions and reached scale quicker.

Australia is the fourth-biggest mutual fund market in the world at $700 million. They take money out of your paycheck and invest it in mutual funds. In Japan, we started as a joint venture with Softbank and that company is now public. We still own 35 percent of Morningstar Japan. In Japan and Korea, we have minority ownership interests in companies. We don’t control the management.

MM commentary: International sales reaching 10 percent to 15 percent in the short time Morningstar has made it a priority is quite an accomplishment.

MB: How do you deal with differences in transparency in foreign markets?
JM: In the U.S., we’re at the forefront of transparency and disclosure. The basic things we take for granted in the U.S. – like expense ratios – are not required for portfolios even in the United Kingdom. We can only work with what we have, take that as a starting point, & supplement that with survey of voluntary information.

We ask for information, and in general, we get good cooperation. We plug it into our analytical tools and it makes them more powerful. There is a wide spectrum of what’s disclosed. The world is moving to greater transparency and watching what the U.S. is doing.

Whenever I go overseas, [foreigners] always ask what’s happening in the U.S. I’m always surprised at the knowledge they have and what they know about the U.S. The U.S. is half the world’s investable assets. We’re looked to as the leader in setting the standards with mutual funds. We’re seen as a model, which is good for investors globally.

MM commentary: It’s a good thing Morningstar gets good cooperation in requesting additional data because little of the rest of the world is as transparent as the U.S.

Specific Countries

MB: How have you structured your international operations?
JM: We’ve learned this by experience. When we first started expanding overseas in the late 1990s, it was more cost-effective – being the scrappy entrepreneurial firm we are – to use joint ventures with capacity (people or capital) on the ground who could jumpstart our efforts. We’ve learned over time that while we’ve liked our partners, our interests and agendas have diverged.

We now prefer a wholly owned approach. Sometimes a partner is required or there’s a special skill needed. We know what we want to achieve internationally. We want to sell global products for an individual, advisor or institution on global platforms that we are selling around the world. We need to plug in the local data set and originate databases on locally domiciled mutual funds.

Once we have that, we plug it into the global platforms. It’s simpler and cleaner for us to do that via wholly owned subsidiaries. Japan and Korea are two unusual cases for us. Japan was our first expansion going overseas. The Japanese government deregulated the financial markets. This opened the distribution of mutual funds, how they were sold and foreign ownership of them.

We started getting requests to bring our products to market and began talking to Softbank. They had a western approach to business. We created Morningstar Japan in the late 1990s, which became public. Through Japan, we entered Korea through Softbank as an extension. We found another partner in Shenzhen, China. We were not experts in either market.

Trying to do a lot 1999 to 2000, it seemed more efficient to leverage off a partner in markets that are different from western markets. We had two good partners for those markets. We’re pleased with both ventures.

Most people are investing in locally domiciled funds. People invest in what’s familiar to them. More and more people are looking beyond their borders for pan European investments in Europe and globally beyond Europe and the Americas to create global portfolios. The trend of investing overseas is happening all over.

MM commentary: Morningstar’s transition from preferring joint ventures to ownership is fairly common often for control reasons.

MB: What’s the nature of the work in your 13 foreign locations?
JM: It has evolved through the years. Our general idea is to replicate Morningstar U.S. in foreign markets. We apply what makes sense in each market. Not all of what we offer here makes sense in a given market. We pick and choose what makes sense in each market. We’ve evolved our local sales offices from opening an international operation.

The first thing we do is set up a flagship Web site for individual investors to build the brand. We put together the data set and launch the Web site. We put data out there for the average investor. They begin to associate us with mutual funds. We then, for example, bring in our analytical tools and begin to hire analysts.

It is a push for us now to build that strong and independent voice. Here we have more than 100 independent security analysts on staff both for funds and securities. In addition to providing the data, we also interpret the data. Independent and unbiased advice has been so valuable to investors. We’re building up our analytical staff around the world. We continue to invest in that area.

We just sent a couple analysts from Chicago to our United Kingdom office to bolster the ranks there. We’re adding in China. Our analytical staff is growing quite a bit. People are overwhelmed with data. Our analysts have differentiated us and made our services more valuable. What really gets us off the charts in the minds of investors is analysts having that qualitative opinion.

We increasingly hire locally. We send some who have knowledge and cover international investments. They see the same companies in other markets (like U.S. fund companies such as Fidelity and foreign mutual funds). It’s the same cast of characters. A lot of the U.S. funds are elsewhere and foreign funds are here. It’s a combination of U.S. expertise and locally grown expertise.

We can’t find experienced mutual fund analysts walking the streets. We own this territory globally. We prefer to train our own analysts. We know how to train them. Our approach has been articulated very well. We’re looking for bright people with top-tier analytical and communication skills. We teach them our approach to security analysis.

MM commentary: It’s great that Morningstar is sending Chicagoans to live and work full-time jobs in foreign countries. That’s how you get to learn how the world really works.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at mike@intlalliances.com.
Click here for Muth’s full biography.

Previous Columns in 2006:
Q&A: World Business Chicago on Chicago as a Success Story (9/19/2006)
Q&A: World Business Chicago’s Tom Bartkoski on Chicago vs. Other Cities (9/12/2006)
Q&A: World Business Chicago’s Tom Bartkoski on Economic Development (9/5/2006)
Q&A: Robert Noe, CEO of 1SYNC in Chicago, on Enforcing Data Standards (8/15/2006)
Q&A: Robert Noe, CEO of Chicago-Based 1SYNC, on Data Standards (8/8/2006)
Q&A: Robert Noe, CEO of Chicago-Based 1SYNC, on Data Synchronization (8/1/2006)
Q&A: Mike Jakob of Sportvision in Chicago on Creating Sports Innovation (7/11/2006)
Q&A: Mike Jakob of Chicago-Based Sportvision on What’s Coming Next (6/27/2006)
Q&A: Mike Jakob of Sportvision in Chicago on Enhancement Technologies (6/20/2006)
Q&A: Christos Fotiadis of ProtoGroup in Chicago on Japanese Culture (6/6/2006)
Q&A: Christos Fotiadis of ProtoGroup in Chicago on Japanese Expansion (5/30/2006)
Q&A: Christos Fotiadis of ProtoGroup in Chicago on Compliance, Partners (5/16/2006)
Q&A: Lakeview Technology Founder Bill Merchantz on Trade Shows (4/4/2006)
Q&A: Lakeview Technology Founder Bill Merchantz on International Partners (3/28/2006)
Q&A: Lakeview Technology Founder Bill Merchantz on Overseas Expansion (3/7/2006)
Q&A: Steven Ganster of Technomic Asia on Chinese Readiness (2/7/2006)
Q&A: Steven Ganster of Technomic Asia on Chinese, U.S. Differences (1/24/2006)
Q&A: Steven Ganster of Technomic Asia on Approaching Chinese Expansion (1/17/2006)
Click for 2005 column archive.
Click for 2004 column archive.


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