Mansueto's efforts to grow Morningstar face high hurdles

Picking through the wreckage of the financial-services collapse, Joseph Mansueto has embarked on a push to make Morningstar Inc. the “premier database” for the world’s investors. But in his ambitious move to grow Morningstar beyond its mutual-fund rating roots, he is running up against some formidable competition.

Since the beginning of 2008, Mr. Mansueto — who owns 68% of the company he founded — has spent $123 million to buy nine companies, all but one in the data business. They range from Dallas-based 10-K Wizard Technology LLC, an online database for U.S. companies’ financial filings, to Ipreo Holdings LLC’s Hemscott, a London-based provider of data on publicly traded companies.

Next, Mr. Mansueto, 52, said he wants to “buy or build” a database for bonds, expand into private-equity data and broaden his reach globally. That would put him into increasing competition with the giants of the financial data industry, including Bloomberg L.P. and Thomson Reuters Corp., both in New York.

“We are starting to bump up against them more, but at $500 million, we’re still very small,” Mr. Mansueto said, referring to annual sales. Thomson Reuters has annual sales of $13 billion; Bloomberg generates an estimated $6 billion. “I think we’re still a very simple organization in that we’re still focused on investors.”

Morningstar has grown exponentially since publishing its first quarterly data book on mutual funds 25 years ago. It now covers stocks, hedge funds and college savings plans and runs an asset-management business with more than $60 billion under advisement. Its physical footprint has expanded to match. Early this year, the firm completed its move into eight floors of new offices in Chicago. On the main floor, the Modernist space is all glass walls, sliding doors and Scandinavian-inspired furniture. It also boasts a TV studio and a large cafeteria with rows of wood tables where employees can sip free soft drinks.

But Morningstar faces some stiff headwinds. On Aug. 1, a government settlement that requires investment banks to distribute independent stock research expires. The business generates about 4% of Morningstar’s overall sales. And two large clients of the company’s asset-management business, hurt by losses in the stock market, canceled their contracts. Those clients account for another 3% of sales.

Mr. Mansueto noted a third headwind: the economic climate, which has scared investors away and made it harder to recruit clients. Reflecting those trends, Morningstar’s asset-management business declined 29% in the first quarter.

In response, Morningstar has cut costs aggressively, suspending a 401(k) matching program for employees, reducing bonuses and tamping down travel expenses. Although first-quarter revenue fell 6.9% to $116.7 million, net income rose 8% to $25 million. A rising stock market will help boost sales in the asset-management business, but New York-based Keefe Bruyette & Woods Inc. analyst Murali Gopal forecasts a “challenging” revenue environment for the rest of the year.

Those pressures make it all the more important for Mr. Mansueto to woo new customers to his expanding data empire, but it’s likely to be a tough sell.

Consider Mike Balkin, a Chicago-based money manager at William Blair & Co. He said he's a big user of Morningstar as “the place to go” for data on mutual funds. While he’s been paying attention to Morningstar’s expansion into other assets, he said, he relies on other sources for that information and doesn’t expect that to change. “Bloomberg and Reuters are very integrated into most firms’ infrastructure,” he said.

Both companies say they provide data — vast amounts of it — that investors draw on to make their own decisions.

“Thomson Reuters is the leading partner of the financial community,” said Eric Frank, president of investment and advisory. “We don’t offer investment advice. We offer transparency,” a Bloomberg spokeswoman said. By contrast, Mr. Mansueto sees his mandate as providing guidance to investors in a “watchdog” role.

Mr. Mansueto said he likes small acquisitions because they are less risky, but with $300 million in cash, he would buy something bigger if it fit. He says he’s not out to displace competitors by imitating them. He has no plans to build a news business, for instance. His edge, he said, is his “laser focus” on the individual investor.

And from that point of view, he said, the company isn’t much different from when he started it a quarter of a century ago, in response to the dearth of information for mutual fund investors.

“What's changed is the scale,” he said.

Ann Saphir is a reporter at Crain's Chicago Business, a sister publication of Pensions & Investments