TORONTO - Morningstar's five-star ratings system is heading north.
Morningstar, of Chicago, has acquired Portfolio Analytics of Toronto, a leading Canadian provider of investment fund information, and renamed it Morningstar Canada.
The acquisition marks the fourth foreign initiative for Morningstar, whose first move outside the U.S. was a joint venture in Japan that was formed two years ago. Subsequently, Morningstar expanded by acquisition to the Australian and New Zealand markets, and negotiated a licensing agreement with a consortium of newspapers in Sweden.
Access to local expertise was a key consideration in making the move into Canada, and Portfolio Analytics is an excellent fit, said Don Phillips, CEO of Morningstar. The firm, founded in 1988 and employing about 50 people, produces the PALTrak fund-software product that it estimates is used by about 30 percent of fund salespeople in Canada. The software contains information on performance, costs, risks and holdings, similar to what Morningstar publishes.
Morningstar and its new acquisition are both privately owned, and financial details of the takeover were not disclosed. Phillips said no management changes are planned.
"What attracted us to Portfolio Analytics was the terrific management team that was there," Phillips said on Nov. 30, in announcing the acquisition. The announcement finally put to rest persistent rumors about Morningstar's entry into Canada.
The former Portfolio Analytics gives its new owner a running start in the Canadian market because of its extensive database of fund holdings, expertise in computer systems, and its emphasis on objective, quantitative analysis. In addition to retail advisor clientele, the new Morningstar Canada has a well-established institutional business.
The firm will continue to act as a consultant to money managers, including pension plans, on performance measurement and on the source of performance. The firm's high-end products include performance-tracking software for pooled funds, which is marketed jointly with the Toronto office of the consulting firm of Towers Perrin.
Morningstar Canada will continue to market its products to advisors under the PALTrak name. But, in the new year, the product will incorporate the five-star ratings system under the Morningstar name. The Morningstar name has significant recognition value in Canada, despite the fact that it has not been previously associated with Canada-based funds.
The most significant shift in strategy for local Morningstar management will be a much greater emphasis on sales to individual investors, particularly via the Internet.
"We plan to enter the retail.com business as soon as we can," said Eric Hogg, president and chief operating officer of the Canadian operation. He added that under the new ownership, the firm will be much more aggressive in marketing and advertising than it has been in the past.
He said Morningstar Canada will become a "multi-channel provider" and will use the Internet to serve individual investors with subscription-based services.
"The technology of the Internet is enabling us to personalize information for investors to allow them to make better choices," said Hogg. He said services to the firm's longtime core market of financial advisors will not only be maintained, but expanded.
The greater focus on individual investors does not mean that Morningstar Canada will be "anti-financial planner or anti-fund," said Phillips. It is essential for Morningstar to listen to all voices in the investing community, but the process must be guided by concern for the success of individual investors, he said.
Morningstar Canada will compete primarily with three other Toronto-based providers of detailed fund performance information. They are publicly traded Southam and Thomson, two of the country's largest communications companies, and BellCharts, a privately-owned independent firm headed by Robert Bell.
Morningstar ratings will be more objective than some ratings currently offered in Canada, said Scott Mackenzie, a vice-president of the Canadian operation.
"Suspicions will arise as to the validity" of competing ratings that do not disclose their methods, said Mackenzie. This will not be the case with Morningstar ratings since its methodology is completely transparent, he said.
Morningstar should also be a positive force in a marketplace where there have been conflicts of interest in fund ratings, said Scott Mackenzie, a vice-president of the Canadian operation. As is its practice in the U.S., Morningstar Canada will charge no fees to fund companies that wish to publicize their ratings in advertising.
This has not always been the case in Canada, according to one Canadian fund marketing official. The executive, who would speak only on the condition of anonymity, said he had been sent a complimentary copy of a fund guidebook and told that the author's practice was to charge a fee if the ratings were cited in advertising. Morningstar does not seek these types of payments because they would compromise its objectivity, Hogg said.