Business Context and Reporting Period
This Form 8-K, filed on April 16, 2021, by Morningstar, Inc., serves as a Regulation FD disclosure containing responses to investor inquiries received through March 31, 2021. The filing addresses operational details regarding DBRS Morningstar, enterprise contract trends, ESG initiatives, investment management strategies, and market share dynamics. It does not contain a formal financial results report for a specific quarter but references data as of December 31, 2020.
Key Financial Metrics and Operational Data
- Assets Under Management (AUM): Total Managed Portfolios AUM/AUA stood at $28.6 billion as of December 31, 2020.
- Direct Security Strategies: Approximately $6 billion in AUM/AUA globally ($4 billion U.S.-only) as of December 31, 2020.
- Morningstar Mutual Funds: Approximately $4.4 billion in AUM as of December 31, 2020.
- Revenue Growth: Over the past three fiscal years, Morningstar reported an average consolidated revenue growth of 15.1% (9.3% organic), outperforming a peer group average of 8.2% (6.9% organic).
- Revenue Mix (License-Based): As of December 31, 2020, estimated sources were 33% from advisors, 25% from asset managers, and 22% from private market investors.
- Cash Flow Timing: License-based products are billed annually with cash collected upfront; asset-based fees are generally invoiced quarterly; transaction-based fees (DBRS) are collected partially upfront and over the transaction life.
Material Changes and Operational Trends
- ESG Transparency: Morningstar released its first global carbon footprint report (Scope 1, 2, and 3) in April 2021, addressing previous low transparency ratings from ISS. The company noted that prior to this disclosure, its emissions data was not public.
- Investment Management Strategy: Growth in AUM has lagged market estimates due to a strategic shift in Investment Management that resulted in client losses. However, underlying progress was noted in Advisor Managed Accounts and Morningstar Managed Portfolios.
- Product Performance: Morningstar Data, Direct, and PitchBook are growing at or above market rates. Sustainalytics is gaining share as an emerging standard in ESG investing.
- DBRS Morningstar: The company highlighted that issuers in Canada benefit from DBRS ratings regarding interest rates, whereas growth in U.S. corporate markets remains constrained by index criteria and regulatory mandates favoring larger peers.
Guidance, Outlook, and Risks
Outlook and Management Commentary: Management anticipates that the release of sustainability data will improve ESG ratings. The company plans to articulate public reduction targets for emissions and align with international standards. Market size and growth estimates for key products are scheduled for update at the Annual Meeting of Shareholders on May 14, 2021.
Risks and Contingencies: The filing lists significant risks including:
- Impact of the COVID-19 pandemic on business and financial condition.
- Cybersecurity liabilities and protection of confidential information.
- Regulatory changes affecting credit ratings, investment advisory, and ESG businesses.
- Market volatility affecting asset-based fees and credit ratings revenue.
- Operational risks related to offshore facilities in China and India.
- Indebtedness potentially affecting cash flows and financial flexibility.
Investor Verification Checklist
- Verify the specific impact of the strategic shift in Investment Management on future AUM growth rates.
- Confirm the timeline and specific targets for the newly announced public carbon emission reduction goals.
- Monitor the May 14, 2021, Annual Meeting for updated Total Addressable Market (TAM) and market share data.
- Assess the competitive landscape for DBRS Morningstar in the U.S. corporate market versus its position in Canada.
- Review the composition of the $28.6 billion Managed Portfolios to understand exposure to third-party subadvisors versus internal management.