UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
May 8, 2009
MORNINGSTAR, INC.
(Exact name of registrant as specified in its charter)
Illinois
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000-51280
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36-3297908
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(State or other jurisdiction
of incorporation)
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(Commission
File Number)
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(I.R.S. Employer
Identification No.)
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22 West Washington Street
Chicago, Illinois 60602
(Address of principal executive offices)
(312) 696-6000
(Registrants telephone number, including area code)
N/A
(Former name or former address, if changed since last
report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
o
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
o
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
o
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
Item 7.01. Regulation
FD Disclosure.
The following information is included in this Current Report
on Form 8-K as a result of Morningstar, Inc.s policy regarding
public disclosure of corporate information. Answers to additional inquiries, if
any, that comply with this policy are scheduled to become available on June 5,
2009.
Caution Concerning Forward-Looking
Statements
This current report on Form 8-K contains
forward-looking statements as that term is used in the Private Securities
Litigation Reform Act of 1995. These statements are based on our current
expectations about future events or future financial performance.
Forward-looking statements by their nature address matters that are, to
different degrees, uncertain, and often contain words such as may, could, expect,
intend, plan, seek, anticipate, believe, estimate, predict, potential,
or continue. These statements involve known and unknown risks and
uncertainties that may cause the events we discuss not to occur or to differ
significantly from what we expect. For us, these risks and uncertainties
include, among others, general industry conditions and competition, including
the current global financial crisis that began in 2007; the impact of market
volatility on revenue from asset-based fees; damage to our reputation resulting
from claims made about possible conflicts of interest; liability for any losses
that result from an actual or claimed breach of our fiduciary duties; financial
services industry consolidation; a prolonged outage of our database and network
facilities; challenges faced by our non-U.S. operations; and the availability
of free or low-cost investment information.
A more complete description of these risks and uncertainties
can be found in our Annual Report on Form 10-K for the year ended December 31,
2008. If any of these risks and uncertainties materialize, our actual future
results may vary significantly from what we expected. We do not undertake to
update our forward-looking statements as a result of new information or future
events.
Investor Questions and Answers: May 2009
We plan to make written responses available addressing
investor questions about our business on the first Friday of every month. The
following answers respond to selected questions received through May 5,
2009. We intend to answer as many questions as time allows, although we will
not answer product support questions through this channel. We may wait to
respond to a given question until the following month if we need more time to
research the answer.
If you would like to submit a question, please send an
e-mail to investors@morningstar.com, contact us via fax at 312-696-6009, or
write to us at the following address:
Morningstar, Inc.
Investor Relations
22 W. Washington
Chicago, IL 60602
First-Quarter Earnings Release
1.
Your comments in the earnings release seems much less negative in terms
of the outlook than its been the last two quartersis that a fair assessment?
You say that your rate of revenue decline leveled out within the quarter. Can
you elaborate on this point? Some frame
of reference in terms what types of clients, products, and markets are you
talking about?
Our monthly organic growth rate,
which had declined throughout 2008, stopped deteriorating within the first
quarter. Some of our more-cyclical business lines showed some signs of
improvement within the quarter, while the end-of-quarter uptick in the equity
market gave support to our asset management
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business. As the year wears on,
though, we face the headwinds of the loss of an Investment Consulting client
whose contract ended in early May and the expiration of the Global Analyst
Research Settlement in July.
2.
Can you talk about the impact of FX translation impact on the bottom
line? I understand the top line impact was $5.7mil. unfavorable but what was
the offset versus expenses? When I look at the FX translation impact what are
the currencies that I should be looking at?
In general our non-U.S. businesses
are younger than our U.S. operation and therefore havent yet attained the
margins of our U.S. business. Therefore exchange-rate movements tend to affect
both our top line and our operating expenses. The foreign currencies to which
we have the greatest exposure are the Euro, the British pound, and the
Australian and Canadian dollars.
3.
In terms of the expense save initiatives, what % of the saves are
captured in the Q1 run rate?
In terms of run rate, our
first-quarter results reflect the majority of our largest cost-saving
initiatives. Our largest expense savings resulted from a reduction in our bonus
expense; our first-quarter bonus expense represents one-fourth of our expected
payout for the year based on our current expectations for the year. In a few
areas our cost savings were slightly greater in the first quarter than they
will be in subsequent quarters in 2009. For example, our expense for 401(k) matches
was higher in the first quarter of 2008 than it was in subsequent quarters
because of the timing of our bonus payments, which often received a 401(k) match.
Therefore our year-over-year cost reduction related to the suspension of our
401(k) match will be lower in subsequent quarters. For other areas in
which we made significant cost reductions, including marketing, our future
expenditures will vary depending on the return we are getting on these
investments.
4.
You say bonus expense declined by $7.3mil. in the quarter. The decline
is from what level?
In the first quarter of 2008 we
recorded bonus expense of $12.5 million.
5.
Advertising and marketing declined $2.3mil. in Q1. Thats from what
level?
In the first quarter of 2008 our
advertising and marketing expense was $5.6 million.
Compensation and
Bonus Expense
6.
Can you give us some sense of how much of the companys expense base is
compensation or what portion is bonus compensation? This will make it easier to
size potential savings from cost trims that are underway.
Over the past three calendar years,
compensation expense has made up close to half of our total operating expense,
while bonus expense has averaged about 15% of total operating expense. Because
of the cost savings measures we implemented in 2009, bonus expense declined to
about 6% of total operating expense in the first quarter of 2009.
7.
Can you elaborate on the changes in the bonus plan that youve
made? What are the drivers of the bonus
today versus last year?
In 2009 we significantly reduced our
bonus expense as one way of bringing our cost structure in line with revenue in
this difficult economic environment. There is still a strong incentive
component to our bonus structure. To the extent that our pre-bonus 2009
operating earnings improve versus our internal estimates, our bonus pool will
grow. If our business performance deteriorates, our bonus expense will fall
further. Please see our proxy statement (available at this link:
http://www.sec.gov/Archives/edgar/data/1289419/000110465909023298/a09-2126_2def14a.htm)
for a more detailed description of our incentive plan.
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Revenue from
Acquisitions
8.
Can you provide any historical detail on the revenue/earnings of your
two most recent acquisitions: CPMS and Global Reports? If thats not possible,
could you provide total 2008 revenue/earnings for the businesses youve
acquired over the past six months?
We typically dont disclose details
about revenue and earnings for specific acquired operations. However, we do
report aggregate revenue from acquisitions, which totaled $27.1 million in 2008
and $5.9 million in the first quarter of 2009. Weve also said that the six
acquisitions we completed in 2008 represent approximately $40 million in annual
revenue.
Acquisition Strategy
9.
Youve made a series of relatively small deals within the U.S. and
outside. Can you help us understand the strategic thinking in terms where you
like to be in say 5 years, in terms of newer products, services and markets and
how you get there? The current process seems like a series of small deals but
help us understand the big picture?
Although we do tend to like smaller bolt
on acquisitions, we wouldnt rule out a larger acquisition if the right
opportunity presented itself. We evaluate potential acquisitions based on a
number of metrics, but most importantly whether they are consistent with our
key growth strategies, which are:
·
Enhance our
position in each of our key market segments by focusing on our three major
Internet-based platforms;
·
Become a
global leader in funds-of-funds investment management;
·
Continue
building thought leadership in independent investment research;
·
Create a
premier global investment database; and
·
Expand our
international brand presence, products, and services.
We believe that each of our recent
acquisitions fits with one or more of our key strategies. Although we have
historically focused on organic growth, we expect to continue making acquisitions
if and when compelling opportunities present themselves.
Effective Tax Rate in 2008
10.
Can you refresh my memory in
terms of what was the driver of the significantly lower tax rate in 2008 versus
2007? Also can you explain in some detail of the mechanics of how the incentive
stock option related tax benefit works?
In Note 15 in the Notes to our
Consolidated Financial Statements in our 2008 10-K, we include a table that
presents a reconciliation of our income tax expense at the U.S. federal income
tax rate of 35% to income tax expense as recorded (i.e., our effective tax
rate). This table helps highlight the main drivers behind changes in our
effective tax rate from one year to the next.
Our effective tax rate declined 5.0
percentage points in 2008, to 35.9% from 40.9% in 2007. The lower effective tax
rate in 2008 reflects a decrease in our U.S. state tax rate following a 2007 change
in state tax law as well as the favorable impact of incentive stock-option
transactions. These reductions were partially offset by an increase in
liabilities for certain tax positions in our U.S. and non-U.S. operations.
In 2007, the state tax law change
referenced above had the opposite effect because of issues related to deferred
tax assets: it increased our effective tax rate by 5.6 percentage points.
Because of the provisions of this change in tax law, we expect to realize a
lower tax benefit when we use our net deferred tax assets in future periods. We
therefore reduced the value of our deferred tax assets and recorded a
corresponding increase to income tax expense as of the date of enactment. The
tax law change had a favorable impact on our effective income tax rate starting
in 2008.
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Regarding your question about tax
benefits from incentive stock options, if an employee who holds incentive stock
options sells shares within one year of exercising the option, the transaction
is considered a disqualifying disposition. The employee therefore pays ordinary
income tax on the transaction. At the same time, Morningstar receives a tax
benefit when the disqualifying disposition occurs, which reduces our effective
tax rate. Because employees exercised more options in 2008and elected to take
an increased amount of disqualifying dispositionswe received a larger benefit
from these transactions than in previous years. The amount and timing of tax
benefits related to incentive stock options varies from year to year depending
on the level of disqualifying dispositions as well as our stock price when
sales are made.
Suspension of 401(k) Matching
Contributions
11.
I was surprised to see your
suspension of matching 401(k) contributions, as it seems like a short-term
benefit that could negatively impact long-term employee morale. Such a move doesnt seem consistent with your
focus on the long-term and protecting what we consider to be among your most
important assets your employees. As an
investment-related firm, I suspect your employees would very much value this
benefit and want to have as much as possible invested during periods when the
market is cheaper rather than more expensive.
Could you please elaborate on the reason for this decision, as well as
how you think it might impact employee morale and loyalty?
This was not a decision we made
lightly. We have a long history of offering employees a 100% 401(k) employee
match up to 7% of salary (within the applicable limits). Helping people reach
their financial goals is at the heart of our business, so suspending the match
was very difficult. Because of the challenging market environment, we looked at
a number of different options for reducing our cost structure. We tried to be
as fair as possible and focus on changes that applied to employees across all
levels of the organization. Our goal was to avoid making across-the-board job
cuts if possible, so we determined that suspending our 401(k) match for
employees in the United States was the prudent thing to do in this environment.
We realize that were asking our employees to make some short-term sacrifices,
but we hope it will pay off in the long term. We plan to reevaluate the 401(k) match
periodically as business trends evolve.
Morningstar Equity
Research
12.
A few questions on the equity
research unit: At the end of last year you had more equity analysts than fund
analysts128 equity analysts to 75 fund analysts globally. Is it fair to say
there is far more revenue associated with your fund analysis than your equity
analysis? I know that technically you can say stock research is part of the
morningstar.com value proposition, but once the Research Settlement revenue
begins rolling off in July, what is the plan for monetizing your equity
research?
If you exclude revenue associated
with the Global Analyst Research Settlement, which expires in July 2009,
the amount of direct revenue associated with our equity research is about in
line with direct revenue from our fund research. As weve said before, were
committed to both fund research and equity research as part of our long-term
growth strategy. We view both of them as crucial, must-have components of
Morningstar.com and several of our other key products.
Although we expect significantly
lower equity research revenue following the expiration of the Global Analyst
Research Settlement, we believe there are opportunities to expand our non-settlement
revenue over the next several years. The disruption in the traditional Wall Street-dominated
sell-side research industry, in particular, has the potential to open many
doors for us.
We plan to work on monetizing equity
research by pursuing opportunities along a number of fronts, including:
·
Expanding
our reach with financial advisors
·
Continuing
to pursue sales opportunities with buy-side firms
·
Pursuing
sales opportunities outside the United States
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·
Continuing
to monetize research by licensing investment products (such as exchange-traded
notes) based on our equity research
·
Continuing
to integrate equity research in our major software platforms
·
Adding our
research to third-party distribution platforms
·
Providing
independent research on initial public offerings prior to and immediately
following their listings
·
Creating
bundled equity services including real-time quotes, fundamental equity data,
analyst research, and company filings
13.
If we net out its theoretical
share of morningstar.com revenue, is the equity research unit profitable?
Roughly speaking, what was the overhead in this area last year and what was its
revenue if we take out the Research Settlement and its share of morningstar.com
revenue?
We have a small but growing equity
research business outside of Morningstar.com and revenue related to the Global
Analyst Research Settlement. We also consider equity research a vital component
of the Morningstar.com Premium Membership service and many of our other
products.
We typically dont report profitability
at a product or business unit level, so we havent disclosed details about our
cost structure in this area, the level of profitability for equity research, or
equity research revenue excluding the Global Analyst Research Settlement and
Morningstar.com.
14.
Without getting into financial
guidance, what is the strategic plan for monetizing your equity research?
Rightly or wrongly, it doesnt seem that traditional buy-side investors are
significant customers and a skeptic might say they are not likely to be big
customers down the road. Since they are significant customers for independent
and sell-side equity research, what are the other ways that ongoing investments
in this area can earn not just a return, but an attractive return in the
future?
We currently monetize our equity
research by providing it on our three major platforms: Morningstar.com for
individual investors, Morningstar Advisor Workstation, and Morningstar Direct
for institutions. We also plan to monetize equity research via enterprise sales,
the buy-side business, and new business initiatives. Our response to question
#12 includes more detail on our plans for monetizing equity research.
Its true that the economic downturn
has made new enterprise sales difficult in the advisor channel, because its
tough to sell a new service into organizations that are in a severe state of
uncertainty. However, we are seeing some encouraging signs in the buy-side
channel. Our institutional equity research service offers buy-side firms access
to a large, expert analyst staff for the price of one internal research hirea
value proposition we believe is compelling. Money managers have also been
turning to independent providers to fill gaps left by shrinking sell-side
research teams and to provide insight into new asset classes such as
exchange-traded funds. In addition, we believe the recent disruption in
financial services may create opportunities for us to enter new business areas.
15.
I ask these questions not because
I dont see a future for equity research, but because I see the road to
profitability as being different and far harder than what we see in fund
research. I also dont think we really know what the roadmap is for this part
of the company beyond including it in premium Web content. Would you ever
consider using a quantitative stock-ratings system rather than the more capital
intensive, analyst-driven approach?
Because the research landscape is
rapidly shifting, part of our equity research strategy involves remaining
flexible so we can take advantage of new business opportunities as they emerge
and respond to client needs. Our approach to equity research focuses on
fundamental, analyst-driven research. We also have significant capabilities in
quantitative research, though, including Ibbotsons expertise in valuation. We
continually evaluate the best approach in light of client needs and would
certainly consider using these capabilities as a supplement or complement to
our fundamental, analyst-driven research.
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16.
How much of a direct expense
reduction can we expect related to the expiration of the Global analyst
settlement contract starting Q3:09?
We are committed to maintaining
broad equity research coverage following the expiration of the Global Analyst
Research Settlement period later this year, although we may need to adjust our
coverage and staffing levels based on client demand. Any direct expense
reductions would likely not offset the significant decline in revenue we expect
for our equity research services in the short term.
Morningstar.com Premium
Memberships
17.
The Morningstar.com premium
subscribers declined 5% on net basis.
Can you break that out between account closings versus new openings? Do
you some stabilization in losses here so far in Q2?
We had roughly 22,000 cancellations
during the first quarter of 2009, compared with 13,000 new individual
subscribers, for a net decline of about 9,000 members compared with year-end
2008.
We typically dont comment on
intra-quarter product trends, so were not able to answer the last part of your
question.
Morningstar Advisor
Workstation and Principia
18.
The decline in Principia seems to
be acceleratingwhats your expectation there?
Also Advisor Workstations went up nicelycan you break that out between
Principia and non-Principia-driven growth given that theres likely some client
migration? Whats driving the
non-Principia-related Advisor Workstation growth given all the turmoil in the
financial markets since late Q3:08?
We dont specifically track the
level of migration from Principia to Advisor Workstation. Anecdotally, we
believe that the recent decline in Principia mainly reflects advisors cutting
back on modules to save money rather than migration. Because most Principia
subscribers are independent financial advisors who may be operating with
limited technology budgets, we believe theyve been tightening their belts to
cut expenses given the turmoil in the financial markets.
The first-quarter growth in Advisor
Workstation was mainly driven by a new site license agreement signed during the
first quarter that included a significant number of new users. Over the past
couple of quarters, the growth in Advisor Workstation licenses reflects new
client contracts as well as additional users and functionality for existing
clients. Part of the increase in previous quarters also reflects
expansions in the scope of some contracts to full-site licenses (where we
include all eligible advisors in our total license count), from tools-only
licenses (where we include a smaller number of advisors based on actual usage).
Although the economic downturn has
caused some advisors and institutions to retrench and more closely scrutinize
software purchases, we believe many advisors have embedded Advisor Workstation
into their daily workflows, which has mitigated the effect of the market
turmoil to some extent.
Morningstar Direct
19.
Morningstar Direct license growth
has done very well given the tough operating environment the last several
quarters, which is surprising. Can you
help me understand the underlying reasons driving growth?
Although growth in Morningstar
Direct has slowed to some extent, weve continued to experience increases in
total licenses over the past several quarters. Part of the reason behind
this continued growth relates to the products diversified customer base. Sales
outside of the United States helped offset some of the weakness in the United
States toward the end of 2008, for example. We believe the continued growth in
global licenses also reflects the strong momentum and brand recognition weve
built up over the
7
past several years. Were becoming
more competitive against other established software platforms by aggressively
expanding our global data coverage and continuously rolling out new features
and capabilities.
Investment
Consulting
20.
A few questions on your
investment consulting business: Do you believe the growing price sensitivity
and competition in this business are cyclical or secular? In other words, is
this going to be a more price-competitive business even in normalized markets
going forward? And how likely is it that some customers whove taken some work
in-house during this downturn will decide theres less reason to outsource this
work in the future?
The extreme disruption in the
financial services arena over the past couple of years could have some lasting
effects, including more sensitivity to price. At this point, though, we dont
know if increased pricing scrutiny would cause specific clients not to
outsource future work. We do believe theres an ongoing need for the type of
consulting work we offer, which draws on our expertise in analyzing managed
investment products, constructing investment portfolios, and asset allocation
theory and practice.
21.
How do you quantify the value you
add for clients? This might be impossible to summarize on high level given a
varied client base, but would be helpful for outsiders to know. At a basic
level, increasing assets under administration and assets under management are
good benchmarks, but it would be good to see more granular measures if
possible. Do you have a given win rate when you compete for new business?
At the end of the day, our goal is
to help investors achieve better outcomes. Metrics such as assets under
advisement and assets under management provide some insight into how widely our
advice is being implemented, but we also focus on the performance of our
investment portfolios based on their long-term risk and reward profiles.
We dont have a win rate that
measures the percentage of potential new business were able to successfully
close.
22.
Can you help us understand the
ways that your value proposition here is unique and in what ways its not?
Specifically, what is the value added beyond the Morningstar brand, given that
each player in this space has a given methodology for allocating money across
asset classes and/or managers, etc. and each can probably make claims of good
results and service.
We believe we have specific
competitive advantages in Investment Consulting that would be difficult for
competitors to replicate. On the Morningstar Associates side, our investment
professionals draw on Morningstars 25 years of experience analyzing investment
managers and strategies. In contrast to most of our competitors, we have direct
access to an extensive, proprietary database, which includes comprehensive data
on underlying portfolio holdings for managed investment products. We believe
this holdings-based data as well as our experience analyzing investment
portfolios give us an additional level of insight into investment strategies at
the fund, fund company, and portfolio manager level. We also have specific
capabilities in plan evaluation and design, manager search, investment
monitoring, and portfolio construction.
With our Ibbotson Associates unit,
we believe that our expertise in asset allocation and strong academic grounding
sets us apart. Ibbotson is well-respected as a thought leader in asset allocation
theory and practice, and Ibbotson has global recognition with institutional
investors. Ibbotson leverages its capital markets knowledge and research to
package portfolio solutions for target-maturity portfolios, investment
consulting, funds-of-funds strategies, and plan sponsor consulting. We believe
Ibbotsons level of academic expertise and ongoing research innovation would be
difficult for competitors to replicate.
23.
Can you talk with specific
reference to investment consulting business where after two quarters of
relatively large client losses, you did not see any large loss in Q1. How are the pipelines looking in this
business?
8
We previously disclosed the loss of
one Investment Consulting client relationship on which we stopped earning
revenue in October 2008. Earlier this year we failed to reach agreement on
a renewal with another large consulting client; this contract expired in early May 2009.
As a matter of policy, we do not
comment on our sales pipelines in asset management or any other area, but we
note that our Ibbotson Associates unit signed 14 new funds-of-funds agreements
in 2008. Often these relationships start out with relatively low minimum fees
and if the arrangement is successful, our revenue grows over a multi-year
period.
24.
What share of this market do you
have today vs. a year ago and how do you measure the size of the overall
market? Youve lost a couple of clients over the past year and explained why.
But are you gaining more clients toospecifically are in net client gains or
losses.
One of our key growth strategies is
to become a global leader in funds-of-funds investment management, so we look
at our size within this area to measure the market share of our investment management
businesses. Based on data from Cerulli Associates, total industry assets in
funds-of-funds programs totaled an estimated $1.7 trillion as of year-end 2008,
down from $1.9 trillion as of year-end 2007. Morningstars combined assets in
funds-of-funds programsincluding Investment Consulting, managed retirement
portfolios, and Morningstar Managed Portfoliostotaled $78.8 billion as of December 31,
2008. Although we have signed up some new clients, our share of assets in this
area has declined slightly, from about 5.8% of industry-wide assets in 2007 to
4.6% in 2008.
25.
Can you talk about the revenue
mix in asset management segment. Youve said about 50% of those revenues are
related to asset levels? What drives the
balance?
There are a few asset management
revenue streams that are more fixed in nature. Many of our subadvisory
contracts include minimum fees that must be paid to us regardless of asset
levels. Our consulting groups also engage in some fixed-fee businesses,
including manager searches and consulting work on behalf of funds boards of
directors.
26.
Also can you talk about the bps
[basis points] on average that you earn on Managed, retirement and investment
Consulting assets?
For Morningstar Managed Portfolios,
we typically charge 20 to 40 basis points. We do not disclose pricing
information for our other asset-based fees because they vary based on a number
of factors.
Ibbotson Associates
27.
What portion of investment
consulting earnings come from Ibbotson? It seems this unit has a skill set and
value proposition that is different from the companys other investment
consulting efforts, so more detail would be appreciated.
We dont break out revenue or
earnings for Ibbotson Associates, but we can tell you that the group has been
generating an increasing portion of our Investment Consulting revenue and
operating income. As of March 31, 2009, Ibbotson had $36.6 billion in
assets under advisement for its Investment Consulting services.
Retirement Advice
28.
In the AUM for managed accounts
do you have any stable value funds? How
are they performing? Whats the risk
that you may have to step in to support some of these investments due to
performance related issues?
Yes, we use stable value funds in
some of our managed retirement accounts. They have not had performance-related
issues that were aware of. In the event that a stable value fund experienced a
loss of
9
principal, we believe that the
stable value funds asset manager and stable value insurer would generally have
primary responsibility for supporting them.
Potential
Litigation
29.
I am going to be managing a large
family portfolio and am considering what I feel is a sizable investment in
Morningstar. I still have a lot to learn about the business, but my initial
concern is about potential litigation. I know that there are suits outstanding
against rating agencies and am concerned this will soon be the case for
Morningstar too. My question is the
following: does Morningstar have any insurance against litigation relating to
its product reviews, research and/or recommendations?
A follow up question is the following: If there is no insurance against
such potential losses, how does Morningstar calculate or estimate potential
liabilities? Is there legislation which protects it from law suits in the US?
In Canada? In other jurisdictions? Surely the amount of investment product sold
based upon Morningstar reviewed product is larger than Morningstars market
cap.
If you could answer these two questions and comment on this issue
generally it would be much appreciated. In the current market, I feel
Morningstar has an edge going forward, but am concerned litigation could wipe
this out entirely and dont understand this at all.
Like other research and data
providers, we include numerous disclaimers about the accuracy, timeliness, and
completeness of our products. We also explicitly state that users should employ
Morningstar data as one source of information but should do their own research and
check other sources.
We rely mainly on the strength of
our balance sheet as self-insurance against potential liabilities. In addition,
we have an Errors & Omissions (E&O) policy in place to protect us
against liability arising from the use of our products in the non-advisory
context. (We maintain separate investment management insurance to cover us from
liabilities arising in the advisory context.) However, if there were a lawsuit
claiming damages stemming from one of our research/rating products, we dont
know the extent (if any) to which our insurance would apply. Its also
difficult for us to quantify the potential liabilities that we could face or
guarantee that lawsuits wont be initiated.
Economic Environment
30.
Do you believe that as the economy
and the capital markets show some sustained rebound there should generally a
lag in terms of growth for your products coming back (ex. asset based)? If not, why not given that discretionary
spending and cost cutting needs to play out before clients think of spending
again?
Were not macroeconomists, so we dont
have a firm view on whether the economy and capital markets are in the midst of
a sustained rebound, as you suggest (though we hope you are right). As
managers we will continue to focus on keeping our costs in check while making
opportunistic strategic investments in the business. We dont know exactly how
much lag time there might be for products to rebound, but we agree that many
clients may be more cautious about spending given the severity of the financial
crisis.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
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MORNINGSTAR, INC.
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Date: May 8,
2009
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By:
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/s/ Scott Cooley
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Name:
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Scott Cooley
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Title:
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Chief Financial
Officer
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11
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