Morningstar Ventures Into Active ETF Portfolios (MORN)

Douglas A. McIntyre

Morningstar Inc. (NASDAQ: MORN) has announced that its Morningstar Investment Services unit has introduced a managed account service with a line-up of five actively managed portfolios that use exchange-traded funds (ETF’s) to cover a wide range of strategies for investors.  Morningstar already offers “managed mutual fund portfolios” and “Managed Portfolios (SM) Select Stock Baskets to advisor representatives.

Morningstar noted that Centaurus Financial (with 500 representatives) and Ameritas Investment Corp. (with 600 representatives) will add the ETF launch to the actively managed mutual fund portfolios.

Interestingly enough, this in a sense puts Morningstar further into funds management.  While it is a very large universe to cover, that almost puts the fund rating system in a strange triangle whereby Morningstar’s own “managed funds” operations are in competition with the outside universe of mutual funds it rates. 

Morningstar is very small compared to the field of highly established mutual funds.  As of Dec. 31, 2007, Morningstar Investment Services had more than $2 billion in assets under management.  That is tiny compared to Fidelity, PIMCO, Vanguard, and more, but $2 Billion under management would be the envy of many small mutual fund families and smaller investment advisors alike. 

We routinely cover actively managed funds and buyouts or industry implications on our open email distribution list that usually goes out twice weekly.

Here is how the company itself describes that analysis and selection process: MorningstarManaged ETF Portfolios are actively managed using a “core and explore”investment process. This strategy combines “core” positions thatprovide exposure to broad asset classes in an efficient and low-costmanner with “explore” positions that seek to add value by takingadvantage of opportunities in the markets. Selection of explorepositions are based on a proprietary ETF-evaluation system developed byMorningstar Investment Services that combines macroeconomic andfundamental factors. Among other factors, the ETF-evaluation systemassesses the composition, structure, and liquidity of individual ETFs,and marries it to research on fundamental factors such as valuation andgrowth drivers of the underlying securities.

Morningstar shares are up nearly 5% today to $65.40, and its 52-week trading range is $46.10 to $85.50.  Its current market cap is almost $3 Billion based upon today’s share prices.  The company generated $321.33 million in 2007 revenues, up from $228.2 million in 2006 and up from $162.7 million in 2005.

Jon C. Ogg
March 24, 2008

Jon Ogg produces the Special Situation Investing Newsletter and can be reached at; he does not own securities in the companies he covers.