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March 29, 2007 

 Q&A: Morningstar Founder, CEO Joe Mansueto on International Investing 10/24/2006
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 Ė Joe Mansueto founded Morningstar in 1984. He has served as chairman since the companyís 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 bachelorís degree in business administration from the University of Chicago and a masterís 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: Why is Luxembourg emerging as a center of funds management in Europe?
Joe Mansueto: That does seem strange, doesnít it? Luxembourg is 2nd, behind the U.S., in investable asset market size, at $ 1 Ĺ trillion. Itís a bit of an anomaly. Like Delaware in the U.S., many corporations have their headquarters there. In Europe, many funds register there. If you register there, you can sell throughout Europe. It makes Europe 1 country with 1 registration. You have to untangle it to see whoís really behind each fund. Thus, Luxembourg emerged as the center. Foreign mutual fund companies have to create an entity to sell here too.
MM comment: All hail Luxembourg!

MB: Why did you choose London as the site for your new data center?
JM: We actually have 2 data centers around the world. In Europe, itís in London. Itís our European headquarters. It has lots of pros and cons. They speak English. Itís the financial center of Europe. Itís a little bit shorter flight from the U.S. Itís a market we feel at home in. The negative is itís quite expensive. I fall off my chair every time I look at those budgets. But itís a great city. There are a lot of efficiencies there. We also have a large data center in Shenzhen, China with almost 300 people. They do a lot of our data processing from around the world, as well as, increasingly, application development. MM comment: Although itís expensive, London is a relatively easy place for Americans to do all sorts of business.

MB: Will new financial regulations in the UK increase transparency to the level of transparency that exists in the U.S.?
Joe Mansueto: There are always new financial regulations coming out everywhere. Around soft dollar disclosure theyíve been on the forefront there, using commission dollars to buy research. Itís been this gray murky area in the U.S. Now soft dollars are broken out so that you know when youíre paying for a stock & when youíre paying for research. It has to be overt. The U.S. is moving in this direction. Itís good for investors. Investors were paying too much in commissions. They were paying for research they didnít always need. Now that itís itemized, theyíd rather pay the lower commission. Itís put pressure on research budgets of large brokerage firms on sell side research. Itís now being more heavily scrutinized. People question if they want to buy it. As an independent research provider, that works in our favor. There is more need for independent research on equities. The UK is ahead of the U.S. on that one. There is a broader trend worldwide towards more transparency. Itís good for Morningstar and investors. Regulators require greater disclosure. Investors outside the U.S. paid very close attention to the scandals here: The New York Attorney General, Elliot Spitzer, looking at investment banks, market timing and directed brokerage. Additional disclosure requirements have followed those investigations. They took note and got ahead of the curve in their markets. We applaud that direction and hope it continues.
MM comment: Iím all for internationalization of mutual funds, however less transparency than we have here in the US only further complicates all of the other variables one must evaluate to assess whether a particular foreign fund is a good investment or not.

MB: What have been the results of your expanded investment consulting business as a result of new agreements in France, Italy, and China?
Joe Mansueto: Our investment consulting business has grown in the U.S. and overseas. There are so many managed products of all kinds: portfolios of securities, mutual funds, closed end funds, ETFís, hedge funds, variable annuities, portfolios of stocks. In the U.S., there are 8,000 mutual funds, 20,000 share classes, 50,000 variable annuities, more than 10,000 hedge funds. Investors find it difficult and confusing to assemble portfolios. We built a consulting business around funds of other managed products. We have 100 analysts with expertise in understanding whatís driving returns of funds and how to combine them without overlap or gaps. Weíve announced agreements with Exane in France, Banca Ifigest in Italy, & Scandia in China. There are 50,000 funds in Europe. Given our strengths in assembling asset allocation programs and knowing what underlying investments drive asset allocations, weíre a natural to be a global leader. The overseas markets are quite sizable and I think theyíre going to be an increasingly large part of the business.
MM comment: The relationship with Scania, from Scandinavia, is a great example of leveraging a relationship in 1 place for the betterment in another.

MB: How does your new China Index Series track the stock market in China?
Joe Mansueto: In some ways, itís much like what we do here in the U.S. We have a metric we call the style box & classify it based on stocks in the portfolio, based on market capitalization -- small, mid, and large on the vertical axis. On the horizontal axis, we show whether the portfolio falls into value, blend, or growth. We have a set of real-time indices based on the Morningstar Style Box. Weíve done the same thing in China. We classify the stocks based on capital valuation & PE ratios. We create the indices. We donít do all 9 quadrants: we do the 4 corners, the extremes. Itís one piece of our Chinese business. The Chinese mutual fund market is relatively small $50 billion but growing rapidly. We announced the mutual fund manager of the year and had a large ceremony live, via satellite on Hunan TV in Beijing. We have a strong business in China. Weíre the officially sanctioned rating agency for mutual funds. The SCRC, the SEC of China, has sanctioned Morningstar as the rating provider of all mutual funds. Everyone must send us their portfolios. We classify funds based on their style so they can monitor style drift. Weíve got a wonderful position. They know us there. Iím told weíre written into college investing textbooks and weíre all over the chapter on mutual funds. Itís a long-term investment weíre making there. The Chinese government is looking at 401 k retirement plans. Weíre bullish there and we have a great management team. Jin Tian heads up our operations. Our COO, Tao Huang, is Chinese. He was born in China & came here for grad school. We understand the Chinese market. Jin Tian had worked in Chicago, heading up our data operations, and then we sent him back to China. He knows how we conduct business. We have a high level of diversity already, but weíre trying to get more international diversity at all levels of the organization. We have a global management team to get them more involved with the strategic direction of the company. Itís a powerful thing, so we donít get too U.S. centric.
MM comment: Although evaluating stocks & funds in China has to be tricky, Iím very impressed that Joe is concerned about adding international diversity @ the board level. This is an area where many, including international, firms are woefully inadequate.

MB: How do you intend to leverage your recent acquisition of Aspect Huntley in Australia?
Joe Mansueto: This is a transaction we announced earlier this year. Theyíre well known down under in providing equity information to Australian investors. They have the best equity database. All of the financial statements of publicly held companies are there. Moreover, they have a staff of independent analysts who write qualitative reports on those companies. Weíre trying to create a global offering and not only provide data, but provide analysis as well by offering an opinion-either buy, sell, or hold. We have that here, in spades, in the U.S, but are always trying to increase our global presence. In Australia, in one fell swoop we acquired both the equity database and stable of equity analysts. If we could find more acquisitions like that, Iíd be very happy. Itís well managed & itís a good cultural fit. Itís going to be a complementary acquisition. We can plug it into our offering & take advantage of those.
MM comment: Down under seems to be an interesting mutual fund market.

MB: Why no operations in South America?
Joe Mansueto: Our aspirations are global. We want to be everywhere investors are. There are some sizable markets in South America, notably Brazil. We already have clients across Latin America. Offshore mutual funds are popular there. As well, we already have an offshore fund database we sell there. Weíre ready to have sales offices there. Latin America is interesting to us and weíre also excited about India. Itís small, but growing rapidly. We have no presence in Africa, but South Africa is interesting, and we always get asked about Israel, but itís a matter of pacing ourselves. We donít want to take on too much too soon. Whatís the next best market for us to enter? How many funds are there? How much demand is there? How much does it cost? We are carefully considering these questions and always evaluating our options. Weíll get to all those markets over time.
MM comment: Latin America is the one noticeable continent thatís missingÖand itís easy to reach, travel-wise at least.

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 Muthís full biography.

Previous Columns in 2006:
Q&A: Morningstar Founder, CEO Joe Mansueto on Mutual Funds, Investing (10/17/2006)
Q&A: World Business Chicago on Chicago as a Success Story (9/19/2006)
Q&A: World Business Chicagoís Tom Bartkoski on Chicago vs. Other Cities (9/12/2006)
Q&A: World Business Chicagoís 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 Whatís 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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