The separation of qualitative from quantitative analysis and ratings at Morningstar, the global giant research, ratings and funds management company, goes way back, prior even to its expansion into Australia and New Zealand more than 20 years ago. That separation is now to end, at least at leadership level.
The amalgamation of the two is unlikely to have any impact on Morningstar’s various categories of clients. Most, but not all, managers integrate the two disciplines anyway, for efficiency reasons if not philosophical. It’s likely that only the quants and fundamental researchers themselves will care much about the change.
When asked about the announcement from Morningstar’s Chicago head office last week (October 22 Chicago time) that the two teams would come together globally, the Australian spokesperson’s first response to a question on its impact locally was: “Aman Ramrakha, director of manager research ratings for Asia-Pacific, will report into Lee Davidson in Chicago. Other than that, no changes.” There are nine research analysts based in Sydney and another two in Mumbai reporting through the Australian office. Globally the integration between the teams would happen in the coming months, she said. In journalistic terms this is called a “Small accident, few hurt” story.
Perhaps a better question to ask is; ‘why has the separation lasted for so long’? There has been method in the madness, after all. The two types of analysts think and behave differently, often coming up with very different views on managed funds and individual stocks. A common criticism of quants is that they are “backward looking” and too influenced by historical data. A common criticism of qualitative or “fundamental” analysts is that they are too subject to behavioural biases and an array of human foibles. They are also a lot more expensive, subject to a star system driving up salaries generally. They can also make big mistakes which can blow up a firm. But, so can the quants, which are more likely to act as a herd, possibly impacting a whole market. A computer doesn’t lie but the model on which its software is based can, in certain circumstances.
Joe Mansueto, still the largest shareholder, started Morningstar in 1984. The firm got a US$91million (A$127.5 million) boost from Japan’s Softbank through a 20 per cent interest in 1999 and floated on the Nasdaq exchange in 2005. It now has about 5,000 employees and more than US$1 billion in annual revenue.
Locally, what became the Australasian operation started a couple of years earlier in New Zealand. Graham Rich, the founder of brilliant!, which is better known as the ‘Portfolio Construction Forum’, had left his management role at the old Norwich Union (now Aviva) to start a financial advice publishing business called Fiduciary in 1992. This included a range of small businesses from publishing to NZ’s first financial planning practice. The next year he set up FPG Research to analyse managed funds in both NZ and Australia. In those days you couldn’t source raw unit price data from anyone other than the managers themselves, so Graham built his own collection and analytical system. The Australian arm grew more quickly due to the size of the market and Graham saw off a number of potential competitors on the data side of his business.
In the heady days of the dotcom boom FPG was spotted by many other players in the financial information space looking for real businesses to benefit from the internet and Graham was keen to take on a partner to continue his growth path. He chose Morningstar which bought a significant minority holding in 1999, which later became a majority and finally, in 2007, a fully owned subsidiary. One of the philosophical views they had in common was the separation of quant from qualitative research. After he left Morningstar Australasia, in acrimonious circumstances, Graham set up Portfolio Construction Forum in 2002.
The core of Morningstar Australasia has remained, with the major differences being entering funds management in Australia, through the purchase of the implemented consulting arm of InTech, and entering the market for individual stock research and portfolio products. The firm also became truly integrated globally, with several prominent Australian employees promoted to senior roles overseas. The president and chief investment officer for Morningstar’s investment management group, overseeing more than US$200 billion (A$280 billion), for instance, is Daniel Needham, who joined InTech in Sydney in 2002.
The announcement in Chicago included the creation of a new position of chief ratings officer, to take effect on January 1, to be filled by Jeffrey Ptak, currently head of manager research (the qualitative team) worldwide. Lee Davidson, who has led the quant research team for the past five years, will lead the merged quant and fundamental teams.
In its statement, Morningstar said: “”More tightly marrying our analysts’ in-depth, qualitative research with our quantitatively derived analytics will help us meet investors’ growing interest across asset classes and spur innovation. Furthermore, creating a chief ratings officer will ensure we maintain our high bar for ratings integrity and efficacy as we develop new methodologies and expand into new investment types.”