The Quiet Billionaire

After an idyllic Midwestern upbringing, Joe Mansueto founded an enormously successful financial information company on the simple premise that people might like an easy-to-use guide to mutual funds. Now, the Morningstar CEO is turning his skills to the risky world of magazine publishing. Can he succeed again?

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Shortly after business school, Mansueto read The Money Masters, by John Train, a collection of profiles of successful investors. One of them was the Oracle of Omaha, Warren Buffett. For Mansueto, it was a transformative experience. He had long been fascinated by investing, and his friends say that studying companies was his only real discernible hobby. "He'd write away for annual reports," says Jarmuth, who lived with Mansueto after they graduated. "The mailman would come, and he'd be cussing because he had 800 pounds of annual reports." Reading about Buffett's no-nonsense, no-frills, long-view approach to investing ignited something in Mansueto, and he sent away for the latest annual report from Buffett's company, Berkshire Hathaway. "It was an epiphany," Mansueto says. Buffett's direct, unadorned letter to his investors was a welcome departure from the typical annual report, which tended to be little more than a thicket of PR-driven bromides designed to prop up the stock price. In discovering Buffett, Mansueto found a model for the kind of businessman he wanted to become: methodical, ethical, and transparent.

Around the same time, Mansueto began investing in mutual funds. In the early 1980s, prior to the widespread introduction of individual retirement accounts and the emergence of the middle-class individual investor, mutual funds were a relatively small phenomenon, and there was no single source of information on them-performance, holdings, and the like. The only way to get that information was to order each fund's prospectus individually, which Mansueto did. One night in his one-bedroom apartment at Clark Street and Wrightwood Avenue, as he looked through all those prospectuses spread out across his dining room table, the idea hit him.

"I thought, Boy, wouldn't it be really interesting if somebody compiled all these things into a compendium, so I wouldn't have to make these calls every three months?" Mansueto says. "Gee, maybe this could be a business. You could publish a book on mutual funds with comprehensive information, with the goal of helping investors make better decisions about the funds they were buying."

And so Morningstar was born. But, methodical as ever, Mansueto waited a few years before actually diving in. First he did that stint at Arby's to see if he wouldn't rather pursue a chain of fast-food health food stores (he would not), and then he spent two years working for a venture capital firm and later as a stock analyst, just to make sure the mutual funds idea held up over time. It did. So in April of 1984, he launched Morningstar.

His timing was astonishing. When Mansueto started Morningstar-first as a quarterly book with a one-page summary of financial data for every fund available, before branching out into newsletters and commercial databases of fund information-there were 1,200 mutual funds with $370 billion in assets. Today there are more than 8,000 funds with more than $8 trillion in assets. Throughout that period of massive growth, Morningstar was virtually the only game in town for getting information on mutual funds, and it continues to be so.

"They've had an immense impact," says Jane Bryant Quinn, Newsweek's personal finance columnist. "Before Morningstar, people had absolutely no idea-you can't really tell anything from the fund's prospectus. Now, everybody wants to buy a five-star fund. All the ads [for funds] trumpet their four- or five-star ratings. It's given people the sense that they can get independent evaluations of mutual funds, which they never had before. Before Morningstar, what did they have to go on but what the salesman told them?"

Today, Morningstar employs 118 analysts to cover 2,000 funds and 1,700 stocks. It has recently launched a database of hedge funds-a notoriously murky corner of the financial world-and taken a huge step into asset management with the $83-million purchase of Ibbotson Associates, a Chicago firm that manages more than $500 million in retirement accounts. Morningstar has offices in 16 countries, including China, England, and Australia. Last year, it pulled in revenues of more than $227 million. But despite Mansueto's initial commitment to helping individual investors by shining a light on the mutual fund world, less than a third of that money came from Morningstar's individual investor services, which consist largely of its Web site. The vast majority of its revenue-$168.6 million-now comes from licensing its data and ratings to financial advisers and institutional clients such as Charles Schwab, Merrill Lynch, Fidelity Investments, Goldman Sachs, and J. P. Morgan Chase.

That arrangement-Morningstar makes money off some of the same firms that it is supposed to be dispassionately evaluating-has raised eyebrows, and in December 2004 the company announced that New York attorney general Eliot Spitzer had opened an investigation into Morningstar Associates, its consulting arm. Morningstar Associates sells its services to 401(k) plans, designing menus of funds that should be attractive to a given company's employees. Spitzer has not specified what he is looking into, but published reports have speculated that his office is investigating the possibility that Morningstar may be paid to recommend certain funds-a charge the company firmly denies. A separate Securities and Exchange Commission investigation into an error Morningstar made in reporting a fund's value was closed in February without action.

The conflict-of-interest accusations are particularly troubling because they cut to the heart of Morningstar's brand identity-providing independent, uncorrupted investment advice without fear or favor, so to speak. When scandal gripped Wall Street in 2001, after Spitzer launched investigations into 11 investment banks for offering biased research in an attempt to drum up banking business, Morningstar's analysts were some of the earliest and most outspoken critics of the shenanigans. And Morningstar eventually stepped in to help remedy the situation-and make some money-by agreeing, as part of the banks' settlement with Spitzer, to provide independent analysis for five banks to pass on to clients. (Ironically, most of those banks offer mutual funds that Morningstar also rates.)

"It would certainly be nice if those investigations wrap up soon," says Marvin Loh, the managing director of D. E. Investment Research, which covers Morningstar, adding that the purchase of Ibbotson has increased worries about conflicts of interest. "Some people have raised concerns that it would possibly conflict with their other business lines. They're rating mutual funds, and they purchase mutual funds" on behalf of clients whose assets they manage.

Mansueto says that there are rigid rules at Morningstar designed to ward off conflicts of interest: one is that the people responsible for selling the data are not allowed to talk to analysts, period. But he is characteristically philosophical about the criticism. "I think it's very fair," he says. "I think it's only natural to evaluate the evaluator. We've tried to be very open and transparent in how we run the business, and let people make their own judgments about who we are, what we do, and how we do it. For the regulators to be looking at this, it's perfectly fine. These are legitimate things to inquire about." When Spitzer launched the investigation, Mansueto's friends Jarmuth and Hanson tried to argue that it was political grandstanding on Spitzer's part-he had just declared his candidacy for governor of New York. "We couldn't get Joe to agree to that," Hanson says.

"One good lesson Joe took away from Buffett in starting Morningstar was developing a thesis on what is a good business-and publishing is a good business," Hanson says, because you incur costs just once to gather the information, and sell it over and over again. (Not to mention, he adds with a wry laugh, "serve a community with lots of money"-investors-"and it shouldn't be too hard to get money out of them.")

But publishing financial evaluations is different from publishing magazines. And the question for Mansueto is precisely how hard it will be for Inc., Fast Company, and, to a lesser extent, Time Out Chicago-he's on the hook for only half of that venture-to get money out of an advertising community that is eyeing print media warily as readership drops and online competition surges. Though magazine ad revenues were up last year a total of 7.6 percent across the board, to $24.8 billion, according to the Magazine Publishers of America, the total number of U.S. magazine ad pages sold in 2005 had crept up by just over half a percentage point over the preceding year. And even as the industry as a whole slowly shakes off the post–9/11 ad slump-a revival driven in large part by the success of celebrity titles like Us Weekly-the business category has been anemic at best. Total ad revenues for business titles last year were $1.65 billion, up from $1.47 billion in 2000. That's an average annual growth rate of just 2 percent-the sort of returns that a Morningstar analyst would scoff at.

Few publications more clearly embody the tumble that print magazines have taken since the Roaring Nineties than Fast Company. When the real-estate tycoon Mort Zuckerman sold it to Gruner & Jahr in 2000 for a whopping $350 million, Fast Company was pulling in more than $77 million a year in revenue and was fat with 2,126 ad pages-more than Vanity Fair. Last year, it took in less than half that-$31 million-with a mere 476 ad pages. Much of Fast Company's decline can be attributed to the fact that the Silicon Valley culture it chronicled with cover lines like "How to Web-ify Yourself" simply doesn't exist anymore-live by the bubble, die by the bubble. And its close identification with the irrational exuberance of the Internet boom is the biggest obstacle it faces in re-establishing a loyal readership: to a business community that still smarts from boondoggles like Pets.com, the term "fast company" doesn't mean what it once did.

Inc., a staid, 26-year-old monthly with a longstanding audience of entrepreneurs and small-business owners, is on better footing. But its numbers are only slightly less disconcerting than Fast Company's-ad pages were down 12 percent last year, and revenue was down 7 percent. Six years ago, Inc. took in $125 million in revenue; last year it pulled down just more than half that. Together, Fast Company and Inc. lost $10 million last year. Mansueto says he hopes to cut that loss in half this year, which essentially means he paid $35 million for the privilege of losing another $5 million this year.

Nor is Time Out Chicago, which was launched a year ago, a sure bet. Though Time Out has met success in London and New York, it remains to be seen whether the magazine's snappy, urban approach to weekend living will sell in Chicago. Already, Mansueto says, it has hit distribution snags: after learning that the distributor had been leaving boxes of the magazines unopened in stores rather than making sure they were quickly put on display-which meant death for a weekly-Time Out had to hire its own people to go store to store and make sure the magazines got on racks. "It's not making money," Mansueto says. "Nor do we plan for it to make money for several years. That's just how it is in the magazine business. But there's some real momentum behind it in terms of the circulation, in terms of the advertising support." (Mansueto declined to offer specific figures, aside from pegging the circulation at "about 40,000"; Time Out Chicago's publisher, Steve Timble, did not respond to repeated voice mail messages.)