A new acquisition has furthered the company's effort to branch out its business -- because, says managing director Don Phillips, most investors want more than just mutual funds.

The Chicago investment research leader announced Monday that it's agreed to buy the institutional hedge fund and separate account database of Wayne, Pennsylvania-based InvestorForce, Inc., a financial software and data integration company, for $10 million. This gives Morningstar the Altvest database -- which covers hedge funds, hedge fund managers and hedge fund data -- as well InvestorForce's institutional separate account database. InvestForce has in turn licensed Morningstar to sell back data for some of InvestForce's applications.

With this agreement, Morningstar will gain over 450 institutional clients, and its database of companies outside the mutual fund universe will grow "substantially," said Phillips, increasing from over 3,000 hedge funds to approximately 6,000, and from over 4,700 separate account managers to about 6,000.

All this is part of an ongoing attempt to turn Morningstar into the kind of authority on hedge funds and separate accounts that it already is in the mutual fund world. The company began tracking separate accounts within the last five years, and has continued to grow its database of hedge funds since starting to follow them in 2005. The goal, Phillips told the MFWire, is "to have a big enough database and enough users that ... hedge funds feel the need to be in the database."

That's how Morningstar made its name in mutual funds, he added. "What really made a difference were financial planners and individual investors," he said. As they told fund companies they wanted to be able to track and analyze products through Morningstar, "they got the fund companies to be more cooperative with us over time."

But relative to the "better-lit playing field" of mutual funds, such persuasion will be all the more important in dealing with hedge funds, Phillips added, since disclosure for hedge funds remains voluntary.

The expansion of Morningstar's data resources and services reflects how investors are broadening their horizons, he explained. "How many people say, I'm only going to own mutual funds, and nothing else?" While hedge funds are "a growing part of the investment universe," the reasoning behind expansion has to do with a kind of holistic approach.

"Our theory is that investors don't want a completely different database and a completely different mindset for thinking about these different investments," Phillips said. They want to choose their vehicles and then run analytics to understand their portfolio as a whole, rather than looking at individual funds in isolation.

"It's all about the portfolio: what does the overall portfolio look like?"

If all goes as planned, Morningstar will be ever better positioned to answer that. "I think we're getting there; we've made significant progress," Phillips said.

 

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