|Our mission has long been to create great products that help investors reach their financial goals. In keeping with this mission, we are currently pursuing five key growth strategies, which we describe below. We review these strategies on a regular basis and refine them as we monitor changes in our business.|
We believe that individual investors, financial advisors, and institutional clients increasingly want integrated solutions as opposed to using different research tools for different parts of their portfolios. To help meet this need, one of our key strategies is to focus our product offerings on our three major platforms:
• Morningstar.com for individual investors;
• Morningstar® Advisor Workstation for financial advisors; and
• Morningstar Direct for institutional investment research professionals.
These products all include integrated research and portfolio tools, allowing investors to use our proprietary information and analysis across multiple security types. We believe we can achieve deeper penetration of our current audiences with each of these platforms, as well as extend their reach to new customers. With Morningstar.com, we’re continuing to expand the range of content and functionality to increase the site’s page views and Premium members. We’re also working on integrating our global websites to leverage our development resources and attract more advertising sales outside the United States. With Advisor Workstation, we plan to build on our large installed base by continuing to add functionality, such as portfolio accounting, client management, and retirement income tools, which will help us reach more advisors around the world. With Morningstar Direct, we plan to continue an aggressive development program to provide data and analysis on securities and investments around the world. We’re focusing on expanding functionality, selling more licenses to existing clients, and reaching new market segments.
We plan to expand our product offerings to better meet the needs of investors. We plan to continue building or acquiring new databases for additional types of investments, including various types of funds outside the United States and other widely used investment products.
We currently provide extensive data on mutual funds, stocks, hedge funds, separate accounts, variable annuities, pension and life funds, exchange-traded funds, closed-end funds, 529 plans, and capital markets. With our acquisition of Tenfore Systems Limited, we now offer real-time stock quotes from nearly all of the world’s major stock exchanges, as well as a live data feed that covers exchange-traded equities, derivatives, commodities, futures, foreign exchanges, precious metals, news, company fundamentals, and analytics.
Our data is the foundation for all of the products and services we offer. When we build investment databases, we intend to own the data whenever possible and minimize license agreements with outside data providers. We also focus on proprietary, value-added data, such as our comprehensive data on current and historical portfolio holdings for mutual funds and variable annuities. Within each database, we continuously update our data to maintain timeliness and expand the depth and breadth of coverage. We expect to continue building out additional databases, focusing on investment products that are widely used by large numbers of investors. We also plan to continue our efforts to establish our databases as the pre-eminent choice for individual investors, financial advisors, and institutional clients in markets around the world.
Over the past several years, we’ve developed a series of proprietary investment indexes that leverage our investment data. The Morningstar® Indexes are rooted in our proprietary research and can be used for precise asset allocation and benchmarking and as tools for portfolio construction and market analysis. All of our indexes are based on transparent, rules-based methodologies that are back-tested and supported by original research papers. Consistent methodology and objective rules make the indexes well-suited for creating index-linked investment products, such as exchange-traded funds, mutual funds, and structured products. We’ve significantly expanded the range of indexes we offer and plan to continue building our index business, including in markets outside of the United States.
We believe that our leadership position in independent investment research offers a competitive advantage that would be difficult for competitors to replicate. Our goal is to continue building investment insights that empower investors and focus our research efforts in four major areas:
• Extend leadership position in fund research to additional markets outside the United States. Over the past several years, we have expanded our analyst coverage in fund markets outside of the United States. We’ve been working to build an integrated team of locally based fund experts who can help us develop a leadership position in additional markets around the world. As of December 31, 2008, we had 75 fund analysts globally, including teams in North America, Europe, and Asia. We currently produce qualitative analyst research on about 1,000 funds outside the United States and plan to continue building our coverage of funds based in Europe and Asia.
• Expand and leverage our capabilities in stocks. Our equity research complements our approach to mutual fund analysis, where we focus on analyzing the individual stocks that make up each fund’s portfolio. As of December 31, 2008, we provided analyst research on more than 2,250 companies. We’ve focused on building both depth and breadth of coverage by adding additional coverage on initial public offerings and other areas. Building a global equity capability with broad coverage has long been one of our strategic goals. We’re committed to maintaining the broad, high-quality coverage we’ve become known for as one of the largest providers of independent equity research.
• Expand our capabilities in hedge fund research. We plan to expand our research and data on hedge funds with the goal of making the hedge fund industry more transparent to investors. Hedge funds worldwide held about $2.7 trillion in single-fund assets under administration as of November 2008, based on HFM Week’s Hedge Fund Administrator’s Survey. Offering data on hedge funds is a natural extension of our work on other managed investment vehicles. We now provide comprehensive data on about 8,400 hedge funds.
• Enhance our retirement income capabilities. As the baby boom generation approaches retirement, we believe many investors will need more information to help them manage income during retirement. We believe these trends will lead to a greater need for information and tools focusing on retirement income planning and long-term savings strategies. We currently offer Retirement Income Strategist, a Web-based financial planning tool that allows financial advisors to create comprehensive income analyses for clients who are in or approaching retirement, as part of our Morningstar® Advisor Workstation platform. We’ve developed several retirement income services for institutional clients within our Investment Consulting area, and we plan to incorporate additional retirement income tools and services in other products over the next several years.
The large number of managed investment products available has made assembling them into well-constructed portfolios a difficult task for many investors. Consequently, funds-of-funds offerings have seen strong growth within the mutual fund, variable annuity, and hedge fund industries. Cerulli Associates estimates that global multimanager assets—including publicly offered funds that invest in other funds as well as investment vehicles managed by multiple subadvisors—totaled approximately $1.7 trillion in 2008. We believe assembling and evaluating funds of funds is a natural extension of our expertise in understanding managed investment products.
Our investment management programs combine managed investment vehicles—typically mutual funds—in portfolios designed to help investors meet their financial goals. When we create portfolios made up of other funds, our goal is to simplify the investment process and help investors access portfolios that match their level of risk tolerance, time horizon, and long-term investment objectives. We draw on our extensive experience analyzing funds to combine quantitative research with a qualitative assessment of manager skill and investment style.
Morningstar Managed Portfolios is a fee-based discretionary asset management service that includes a series of mutual fund, exchange-traded fund, and stock portfolios tailored to meet specific investment time horizons and risk levels. Through our Retirement Advice platform, which includes Morningstar Retirement Manager and Advice by Ibbotson, we also offer managed retirement account services. We offer these managed accounts for retirement plan participants who choose to delegate management of their portfolios to our managed account programs, which select investment options and make retirement planning choices for the participants. We believe that retirement plan participants will continue to adopt managed accounts because of the complexity involved in retirement planning. In addition, the Pension Protection Act of 2006 may encourage plan sponsors to adopt managed accounts as a default investment option. As of December 31, 2008, we had $1.6 billion in assets under management through Morningstar Managed Portfolios and $11.0 billion in assets under management in our managed retirement accounts.
In addition to the assets we manage directly, we had a total of $66.2 billion in assets under advisement in our Investment Consulting business as of December 31, 2008. Our consulting business focuses on relationships and agreements where we act as a portfolio construction manager or asset allocation program designer for a mutual fund or variable annuity and receive a basis-point fee. We see continued potential to develop this part of our business, including in markets outside the United States. We plan to continue building this business by focusing on performance and client support, building new relationships, and developing new portfolio strategies and products.
Over the past several years, we have expanded our product offerings outside the United States. Our recent acquisitions of several Hemscott businesses, Fundamental Data Limited, Tenfore Systems Limited, and InvestData (Proprietary) Limited, (described in more detail below) all significantly expanded our operations outside of the United States. Our operations outside of the United States generated $121.4 million in revenue in 2008, including $19.4 million from acquisitions, compared with $89.7 million in 2007. We plan to continue expanding our non-U.S. operations to meet the increasing demand for wide-ranging, independent investment insight by investors around the globe. Because more than half of the world’s investable assets are located outside of the United States, we believe there are significant opportunities for us in non-U.S. markets. Our strategy is to focus our non-U.S. sales efforts on our major products, including Morningstar Advisor Workstation and Morningstar Direct. We also plan to increase our sales staff, build a larger analyst team outside the United States, and explore new markets, such as India, Latin America, and South Africa.