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Morningstar

Q&A: Joseph Mansueto of Morningstar

John Waggoner
USA TODAY

Joseph Mansueto is founder and CEO of Morningstar Inc., a Chicago-based investment investment research and management company. He talked recently with USA TODAY investing columnist John Waggoner. The interview was edited for clarity and length.

Q. As a student of newspapers, what are the impediments for them moving to digital?

A. They are moving to digital. The problem is that digital is not as profitable as print. To me, it's only going to get worse as the supply of content grows much quicker than the eyeballs. . And so you've got large and growing supply and more stable demand, which puts downward pressure on prices. So they can move, but it's just not going to be as profitable.

Jospeh Mansueto, chairman and chief executive officer of Morningstar Inc., speaks at the Morningstar Investment Conference in Chicago on June 8, 2011.

Q. You know from your days as a newspaper analyst that back in the day, newspapers were insanely profitable properties. Is it a problem with publishers' mindset that they can't get their minds around the fact that they're not making 30% margins?

A. There are really only two kinds of newspapers. The big metro papers and the small community papers. I have some papers in Texas, along the Rio Grande valley, which have 30% operating margins. In a local community -- these are little towns like McAllen, Odessa, – where it's still an important source of obituaries, who's getting married, local sports. It's content you can't get anywhere else. In a large city, you're not connected to the community in the way you are in a little town. And so it's largely the national news, and you can get that from a lot of places. And you have to figure out where those unique sources of content are and emphasize that, but that's much harder to do in big city than a small town.

Q. People say that Millennials are not as interested in investing. They have seen from their parents two face-melting bear markets, a horrible meltdown in housing and haven't seen a cent in interest in a third of their lives. Have the last 15 years left an indelible impression on investors?

A.They certainly have left a strong impression on investors. Whether they are indelible or not, I wouldn't cast it in that strong a light. My parents' generation lived through the Great Depression, and that lived forever in terms of how they viewed the world and spent money. The '08-'09 period was a financial depression, but it was short-lived. It left a very strong impression, but certainly not indelible, especially as the markets improve. But it certainly has taken a long time. Even after '08-09, five years later, people are still investing in fixed income, even though equity markets performed well. And now after five years of good performance, they're starting to get into equities, but they have missed the run-up. For Millennials, they might still not be there. What it's going to take to get Millennials thinking investing is cool, we haven't found the silver bullet for that. It's going to take some education and time.

Q. Back when you were starting Morningstar, the vision was that the whole world would be no-load funds, and we'd all go out and buy our own funds and determine our own future. It would be a no-load investing revolution. Now, the share of direct sales is just a tiny slice of the pie, and most people buy funds through financial advisers. What happened to the revolution?

A. I often tell that story. When I started Morningstar 30 years ago, there were big ads in the paper – Fidelity, Dreyfus, 800 numbers – and the fear was that no-loads were going to take over the world. And what people didn't understand at the time, but over the next decade became more apparent, was that most people wanted to deal with an adviser. They weren't comfortable handling the decisions solely on their own. They wanted to talk to, someone to help them make the decisions. So investors voted with their feet and started to move to adviser channels. And funds that sold through advisers really began to boom in relation to the no-load channels. So all of a sudden, the pure no-load shops began to change course and they didn't get rid of their no-load offerings right away. But they started to embrace advisers, because investors really wanted to engage face-to-face. What we have seen is one of the appeals of no-load funds is that they were cheaper. And what we have seen in studies of expense ratios is that investors are really emphasizing low-cost funds in their portfolios. Ninety-five percent of the cash flows the past decade have gone into the cheapest funds. The desire to save money, whether it's going to Walmart or buying funds, is very strong in the American populace.

Q. Looking at the fund industry now, do you see any excesses?

A. Well, one thing I worry about are the massive inflows that have occurred in fixed income, and whether investors understand what that means. On the face of it, it's safe, but as rates move up not only will people get a shock on their longer-duration fixed income assets, but asset prices will come down. The distortion caused by low interest rates – I don't think that has been fully played out.

In terms of what the investment industry can control, there's some concern about unconstrained bond funds, those kind of go-anywhere funds in search of yield. Yield sells. People want yield. They're unconstrained. What could go wrong with that?

The question is, what's in these bond portfolios? Especially as more of these are synthetic, they're not really clipping coupons and buying bonds as we know them. It has made it harder for us to analyze bond portfolios. We have a big effort underway around derivatives so that we can understand the composition of bond funds, where the exposures are. You need to understand the derivative holdings to do that. If it's hard for us, it's really hard for the average investor.

Q. You seem wary of the stock market at this point. Are there any parts you feel are undervalued now?

A. If you look at our Morningstar five-star stock list, it's pretty short. To me that's a sign that it's appropriate to be less enthusiastic about equities. But if there is one area I like it's energy. If you have a long horizon, I do think energy prices will rise, but I can't tell you when that is. I do like areas that are very cold and unloved. Energy stocks have nice dividends, so you get paid to wait. Whether it's a fund that has broad energy exposure, whether it's an ETF or individual stocks, I think energy makes a fair amount of sense.

Q. You're a business owner, you talk to a lot of business owners. What sense do you get about the economy?

A. I think we continue to muddle along and grow at a very low single-digit rate. I had lunch last week with the CEO of a multibillion-dollar industrial company, and based on his businesses, he thought the GDP numbers would be much worse than reported and that things aren't as good as what is being reported. In the financial industry, the regulatory burdens very large. Complying with Dodd Frank and other regulations are really weighing down on firms – JPMorgan Chase, for example, has hired thousands of compliance people, and that has a dampening effect on business behavior. There's a positive slope to the economy, but not a robustly upward-sloping line.

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