NEW YORK -- Coming soon to a portfolio near you: Morningstar-branded equity indexes, mutual funds and exchange-traded funds.
Starting in 2002, the financial research firm known for its ratings of mutual funds and stocks plans to launch a line of indexes compiled according to company size and investment style.
Morningstar-branded mutual funds and exchange-traded funds are expected to follow, although not directly from Morningstar. For a fee, the firm will license investment companies to use its indexes as a branded tie-in for their own products.
"We've had negotiations with a number of different companies and we think there will be some interest," said Don Phillips, managing director at Morningstar. "We hope to have an announcement in early 2002."
The move is part of a larger strategy by Morningstar to leverage its reputation. In January, subsidiary Morningstar Investment Services Inc. will begin creating and managing fund portfolios for firms including Commonwealth Financial, SIGMA Financial and KMS Financial.
Morningstar believes its approach to fund and equity analysis -- specifically, its Style Boxes that assess levels of risk -- will give it an edge.
But the competition is stiff. Many other financial research firms already market and brand their expertise.
Standard & Poor's, Lipper and Dow Jones, among others, have their own indexes. S&P licenses its indexes to investment companies, including Vanguard and Barclay's, for use respectively in mutual funds and exchange-trade funds, or ETFs.
The Nasdaq Stock Market is expected in 2002 to unveil its own ETF that tracks its Nasdaq composite index. The American Stock Exchange already has an ETF, called the QQQ, that tracks the Nasdaq 100.
There is some debate about whether Morningstar's move is a good one, from a business or ethical perspective.
"If Morningstar is going to be in the business of licensing these products, it potentially compromises their objectivity in the evaluation of mutual funds," said Eric Tyson, author of "Mutual Funds for Dummies." "Imagine Merrill Lynch or some big fund family comes to them and says we want to develop a fund and we're going to pay you big money. Then Morningstar has to turn around and objectively evaluate their products.
"Also, do we really need more indexes? What are they going to add that isn't already out there?"
But Consumer Reports' finance editor Marlys Harris sees value in Morningstar's proposition.
"Their approach seems to be a more refined way to looking at indexes," said Harris, whose magazine is also a Morningstar customer. "They plan to be very transparent about how it's calculated right from the beginning, which is a good thing. Not all indexes do that."
She's not worried about bias, noting that many other research firms already provide similar services.
"Morningstar is pretty well respected and I think in, large part, that respect is deserved," she said.
Phillips, the Morningstar director, is confident his company will be able to maintain its impartiality.
Morningstar will only be directly involved with the indexes, he noted. Any funds, ETFs or other financial products will be handled and managed by outside firms. And those products will be subject to the same review as their competitors.
"The protocols of how to operate are well established," Phillips said. "You have the S&P, Dow and other players that are in the index business but still have pristine reputations."
The true test will be with consumers and financial planners, who have to decide whether to use the new services.
The Morningstar name enjoys strong recognition among individual investors and financial planners. Its new portfolio management services may also raise its profile among this group.
"I think Morningstar had a good quality name," said Michael Chasnoff, a certified financial planner in Cincinnati. "But whether we use their indexes or the funds and ETFs will come down to performance. How do they compare? With the funds, the key will be looking at expense ratios and all the other ways we measure performance."
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