A Comprehensive Guide for Checking Prospects
The fact that it has become so difficult to tell the players without a score card in the mutual fund business helps explain the phenomenal rise of Morningstar Inc.
The Chicago-based company, just 8 years old, publishes what may be the best tout sheets on individual mutual funds anywhere. Each report is packed with information about investment returns, risk, fees and more.
Better yet, each fund gets a critical review from a Morningstar analyst and a grade, ranging from one star up to five, that summarizes its risk-return potential.
In contrast to some other companies that track performance data, Morningstar neither sells such information to mutual fund companies nor accepts advertising.
“That allows us to be critical,” says Don Phillips, publisher of Morningstar Mutual Funds, the company’s flagship product.
The first copy of that publication rolled off the presses just six years ago, but already it has attracted 27,000 subscribers paying $395 a year. (Investors can get a three-month trial subscription for $55.)
Morningstar’s reputation within the industry has grown just as quickly.
The privately held company numbers 175 employees and logged revenue of $4 million in 1991. That’s projected to climb to $11 million this year and $20 million in 1993. In the past, Morningstar has made Inc. magazine’s annual list of fastest-growing businesses.
What makes Morningstar’s fund reports so helpful is that they provide just about everything you need to know about a portfolio.
And thanks to the rating system, investors can quickly get an idea of whether a fund is a star or a dog, although Phillips cautions subscribers to regard these grades as a “first-stage screen.”
Some of the most useful statistics include yearly total-return numbers, expense ratios and comparisons that show how a fund has performed against its peers and market benchmarks. This information goes back as many as 12 years.
You can also find out a portfolio’s current top stock or bond holdings, asset composition, phone number, required minimum investment and everything in between.
Morningstar has 30 analysts who write the reports. Together, they track more than 1,200 of the largest, most established stock and bond portfolios.
You can find much of the information contained in a Morningstar report by gleaning a fund’s prospectus and shareholder reports, but it will take you longer. Some of the data in the reports--such as Morningstar’s rating systems and risk measures--are hard if not impossible to locate elsewhere.
“Risk is one of the most important things you should look at in mutual funds,” Phillips says. Morningstar’s one-to-five rating system rewards funds that perform well relative to the amount of risk they assume.
For advanced investors, Morningstar makes the same information available on CD-ROM disks, a computerized format. The advantage here is that you can evaluate funds much more quickly by sorting them according to whatever performance, risk or other criteria you select.
Morningstar was founded in 1984 by Joe Mansueto using money borrowed from his father. Mansueto, an Indiana native who earned an MBA at the University of Chicago, had been working as a stock analyst at Harris Associates, a Chicago mutual fund outfit.
Mansueto, 35, remains majority owner of the firm but has largely handed over the public relations and promotional duties to Phillips, 30, who purchased his first mutual fund (Templeton Growth) when he was 13 and has been interested in the topic ever since.
Phillips started writing fund-analysis reports for Mansueto in 1986, shortly after having graduated from the University of Chicago with a master’s degree in English literature.
In Phillips’ view, Morningstar couldn’t have progressed as rapidly as it did without the advent of the personal computer and software that allowed the fledgling company to crunch the necessary numbers and package the information in an appealing format.
“The company was basically founded on the PC,” he says.
Morningstar’s first publication, Sourcebook, debuted in 1984 as a compendium of fund reports. It’s still produced annually (the cost is $225) but has been eclipsed by Morningstar Mutual Funds, which features updated reports every two weeks. Both products cover much the same information.
Morningstar (800-876-5005; 53 W. Jackson Blvd., Chicago, Ill. 60604) also tracks closed-end funds and variable annuities in either print and/or electronic form.
And in September, the company came out with 5-Star Investor, a monthly newsletter that already counts 10,000 subscribers. With more emphasis on how to evaluate funds and a lower price ($65 a year), this might be Morningstar’s most appropriate product for individuals.
People wanting to see Morningstar Mutual Funds or the Morningstar Sourcebook might check with their broker or financial planner, since many professionals or their firms are subscribers.
Libraries are another good source. According to the company, Morningstar Mutual Funds is carried by libraries in Los Angeles, Long Beach and 12 other Southland cities, including six in Orange County.
