Morningstar begins courting money managers

After retail investors embraced its stock-research service, Morningstar Inc. has launched a product to court professional money managers, a customer base it’s just begun to tap.

The move is part of Morningstar’s push to expand its stock-research business.

“We are really pursuing selling and positioning ourselves as an independent stock researcher,” says Catherine Odelbo, president of securities research at Chicago-based Morningstar.

Called Morningstar Select Equity Research, the program targets managers who oversee $100 million to $10 billion in assets, including trust officers, mutual fund and separate-account managers and financial advisers who specialize in equity trading.

“A lot of these money managers who don’t use funds, they really haven’t had a reason to come to Morningstar because most of our products are fund-oriented,” says Ms. Odelbo. “Now we have a product that appeals to them.”

So far, the program is winning favorable reviews.

Kevin Silverman, a buy-side analyst at ABN AMRO Asset Management (USA) LLC in Chicago, praises the service for not regurgitating the same information that’s publicly available to everyone, which is what he says most Wall Street research firms do.

“It’s not a `me, too’ product,” says Mr. Silverman. “It’s got a consistent and proprietary approach to valuation. They are not always right, but I know I can look at any company they cover, and the approach is going to be the same. You can’t say that for Wall Street firms.”

Morningstar had a “soft launch” of the product earlier this month in a test run to 20 users.

the money flood

Morningstar’s move into institutional research comes a year and half after it started offering research reports and star ratings on stocks to retail investors.

So far, the research, which is offered as part of its premium paid service on Morningstar.com, has become a major draw for the site.

Of the 105,000 paid subscribers, more than half are accessing the information, and more than half the site’s page views are being generated by the stock research, says Ms. Odelbo.

That’s translating into big bucks for the privately held company.

Revenue from stock-related products and services now accounts for 10% of Morningstar’s overall revenue, says Ms. Odelbo.

“It’ s one of the fastest growing pieces of revenue in the business,” she adds.

And it’s a business Morningstar intends to develop further.

Currently, Morningstar has 30 stock analysts covering 1,000 stocks. Morningstar puts out star ratings on 500 of these stocks, but is looking to expand the analyst staff to 40 this year, with an eye toward eventually offering star ratings on all the stocks they cover.

“As we continue to build services and products and the revenue comes in the door, I’ll continue to plow that back into more analysts,” says Ms. Odelbo.

star ratings tweaked

While Morningstar’s research department concedes it has made a few rotten calls, the group says some adjustments it made last September have improved the process.

To achieve a five-star rating, a stock must trade at a significant discount to its fair-value estimate, which Morningstar calculates through a discounted cash-flow model.

Prior to last fall, the model treated all stocks equally, with each needing a 30% discount to get five stars, says Pat Dorsey, director of stock analysis.

After Morningstar realized it didn’t make sense to treat all stocks equally, it added an “economic moat rating” – a Warren-Buffett term which is a measure of a company’s competitive advantage.

“What we did is basically said the stronger a company’s competitive advantage – or the wider its moat and the lower its risk – the less of a discount to fair value it needs. On the flip side, the shakier its competitive advantage and the riskier it is, the bigger a discount we want,” says Mr. Dorsey.

Since the change, a smaller percentage of stocks covered by Morningstar is getting five stars, he says.

Morningstar says its feedback indicated money managers are frustrated with Wall Street research firms.

Managers often don’t get the access to the analysts themselves, particularly if they are smaller players, and the flap over conflicts of interest on the sell side has led many to seek more independent research providers.

Morningstar Select Equity Research, which costs $10,000 to $20,000 a year, offers managers access to all of its star-rating models, lets them plug in their own numbers, and gives them access to all the analysts.

It also includes a best-ideas list of stocks on which Morningstar is saying, “`Back up the truck, load up,”‘ says Ms. Odelbo.

“An adviser who does a lot with equities would definitely be interested in this service because what it does is allow an adviser or a money manager to basically outsource [research],” she says.

“Maybe they can’t afford to have 30 analysts on their staff. Maybe they can only have two, so we can help them leverage their analyst staff with our 30, soon to be 40, analysts.”