This article focuses on Morningstar’s business model, data analysis methods, and rating methods. Morningstar is an independent investment research, rating and consulting institution headquartered in Chicago. It provides financial services and products to investors worldwide, including data on almost all financial products globally such as stocks, funds, indices, derivatives, commodities, annuities, etc. Morningstar also created its own research methodologies such as Morningstar RatingTM, Morningstar Analyst RatingTM, Morningstar Style BoxTM, etc. Morningstar also offers asset management services. As of September 2014, assets under management were approximately US$169 billion.
Morningstar’s main customer groups are financial advisors, asset management, pension funds, and individual investors
Morningstar’s main customers can be divided into four categories: financial advisors, asset management, pension funds, and individual investors. For financial advisors, Morningstar provides software, with Morningstar Advisor Workstation as the main product, through which advisors can simulate investment portfolios, construct portfolios, make investment decisions, and even attract customers for their clients. For asset management, including asset management companies and fund companies, Morningstar mainly provides research results, with Morningstar Data and Morningstar Direct as the main products. For pension funds, similar to asset management, Morningstar provides investment solutions to help manage pension funds, with main products including Retirement Solutions and Investment Advisory services. For individual investors, Morningstar mainly provides its official website, with some free content for browsing, but most only open to members.
Morningstar’s most popular and profitable products and services are Licensed Data, Advisory Workstation, and Morningstar Direct
Morningstar’s three best-selling and most profitable products and services are Licensed Data, Advisory Workstation, and Morningstar Direct. Licensed Data refers to the financial data collected and standardized by Morningstar, covering company financial statements, fund, index, derivative and other data, which is very extensive and has covered most of the markets. Advisory Workstation is a software for professional personal financial advisors or investment advisors to construct portfolios and screen investment tools. This software is mostly used in the United States. Morningstar Direct is prepared for institutional investors and is the most comprehensive product, not only including the above data, but also research reports, analytical tools, and is an all-round platform.
Morningstar’s stock rating methodology focuses on assessing intrinsic value and economic moat
Morningstar’s basic process for analyzing a stock is: 1) Fundamental analysis; 2) Measure economic moat; 3) Valuation using discounted cash flow model; 4) Calculate intrinsic value; 5) Uncertainty rating; 6) Comprehensively consider stock price/intrinsic value ratio and uncertainty rating to give a rating. The economic moat theory was first proposed by Warren Buffett. It refers to a company’s competitive advantage and long-term profitability. The wider the moat, the stronger the ability to withstand competition and generate economic profits for longer, thus higher intrinsic value.
Morningstar’s fund rating methodology focuses on risk-adjusted returns within peer groups
Morningstar only rates open-end funds with at least three years of performance data, excluding money market and principal-protected funds. Funds are rated monthly. Morningstar analyzes funds based on the Holding Based Style Analysis method, by looking at the fund’s actual holdings rather than returns relative to a benchmark. The first step is to classify funds into categories based on strategy, as funds pursuing different strategies cannot be compared. Within each peer group, funds are compared on 3/5/10 year annualized returns adjusted for risk. The top 10% get 5 stars, next 22.5% get 4 stars, etc.
In summary, Morningstar is a leading independent investment research firm. Its business model focuses on collecting comprehensive global financial data and turning data into value-added products. Morningstar has its own methodologies for analyzing stocks and funds, with a focus on long-term intrinsic value.