Morningstar plans to be a ‘one-stop shop’

CHICAGO — Morningstar Associates LLC, the investment advisory arm of fund research firm Morningstar Inc., will offer itself as a one-stop shop to manage the investment programs of midsize endowments and foundations.

In an interview, Scott Riccio, Morningstar Associates' newly named director of foundation and endowment services, called the move a "natural extension" of work the firm already does — from asset allocation to manager selection and monitoring — for insurance and retirement outsourcing clients. The firm has $35 billion in assets under advisement, not including assets advised separately by Ibbotson Associates Inc., the Chicago-based firm Morningstar acquired on March 1.

Endowments and foundations with less than $1 billion in assets are increasingly looking for one firm that can offer a "seamless, comprehensive" service, building and maintaining portfolios tailored to their specific grant-making missions, Mr. Riccio said. Several told Morningstar they have yet to find a program that meets their needs, he said.

Calling smaller endowments and foundations an "underserved niche," Joe Mansueto, Morningstar's chairman and chief executive officer, predicted his firm's experience at evaluating money managers and crafting portfolios should help its new offering garner a "very strong reception."

Mr. Riccio said Morningstar will focus on the roughly 1,000 endowments and foundations in the U.S. with assets of $50 million to $1 billion, although the "sweet spot" will likely be those with $300 million to $500 million.

With 73 employees, including 16 senior consultants, Morningstar will look to provide a service that compares favorably — in terms of customizing investment programs to the specific circumstances of each client — with competitors, he said. Firms such as Commonfund, Russell Investment Group and SEI Investments Inc. offer manager-of-managers programs for endowments and foundations. Consultants, including Cambridge Associates LLC and Mercer Investment Consulting, provide asset allocation studies, among other services.

After reviewing an institution's mission, objectives and spending needs, Morningstar executives say the firm's consultants will set a strategic asset allocation plan, and then construct an investment portfolio using open-end, institutional-class mutual funds. Morningstar will monitor the portfolio on an ongoing basis.

Mr. Riccio said focusing on institutional mutual funds will give Morningstar a degree of flexibility and independence in tapping the widest possible range of best-of-breed managers, which should appeal to clients seeking programs fitted to their specific needs.

From the endowment or foundation fund's point of view, the need is for someone to "take over the investment process … but be accountable …," said Mr. Riccio. The funds want someone who knows the smallest details of their financial and grant-making needs, who can sit with them and report to their boards on a quarterly basis, he said.

That promise of customized, personalized service leaves Morningstar executives hesitant about setting specific growth targets for the business.

Morningstar's mission is to be "broadly, deeply involved with each of the clients we take on. … (The service) will grow at a rate that allows us to be personally involved," said Mr. Riccio.

"We haven't really set up any metrics," agreed Mr. Mansueto. "We plan to grow this business over time, making significant investments to put out a top caliber service."

Marvin Loh, a Boston-based research analyst with Oppenheimer & Co., said Morningstar's newest offering is only the latest sign that the company is looking to make the investment advisory business a major focus of its growth strategy.

For the year ended Dec. 31, the institutional segment of Morningstar's business contributed 41% of the firm's revenue, vs. 32% from the financial adviser segment and 27% from individual investors. For the second quarter, even without the contribution from Ibbotson, Morningstar reported 28% growth in its institutional revenues, outpacing respective growth of 22% and 21% by the firm's individual and financial advisor segments.

Mr. Mansueto said serving institutions is just another means of meeting the needs of the individuals those institutions ultimately serve. Institutional investors are "by far the largest market we're addressing, and it's only natural that over time that (segment) is going to be an increasingly large part of our business."