Morningstar 2014 Shareholders Meeting Annual Report

Transcription

1 Morningstar 2014 Shareholders Meeting 2012 Annual Report

2 Business of Annual Meeting Management Presentations Break Questions and Answers

3 To send in a question for the Q&A session, please visit:

4 Today s presentations contain forward-looking statements. All statements made that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. Please refer to our most recent earnings release and our most recent Form 10-Q or 10-K for more information on the factors that could cause actual results to differ. Today s presentations also contain non-gaap financial measures. Please refer to the slides at the end of the presentations for a reconciliation to the applicable GAAP measures.

5 Morningstar Update Joe Mansueto Chairman and Chief Executive Officer

6 Mission & Strategy Industry Landscape 2013 Highlights 2014 Update

7 Mission & Strategy

8 Slide Title 32

9 Widening the Moat Moat Sources Brand/ Intangible Assets Switching Costs Network Effect

10 Key Objectives... Develop the nextgeneration software for our investment research platforms with an elegant and intuitive user experience for our customers Deliver the most effective investment data, research, and ratings to help investors reach their financial goals Be a world-class investment management organization based on our proprietary research

11 Our Strategy Goal: Widen Economic Moat Brand/ Intangible Assets Switching Costs Network Effect Key Objectives... Major Customer Groups Advisor Asset Management Retirement Individual Investor

12 Four Major Customer Groups Advisor Asset Management Retirement Individual Investor

13 Four Major Customer Groups Advisor Asset Management Retirement Individual Investor 260,000 financial advisors

14 Four Major Customer Groups Advisor Asset Management Retirement Individual Investor 260,000 financial advisors 1,500 asset management firms

15 Four Major Customer Groups Advisor Asset Management Retirement Individual Investor 260,000 financial advisors 1,500 asset management firms 26 plan providers 237,000 plan sponsors 24 million plan participants

16 Four Major Customer Groups Advisor Asset Management Retirement Individual Investor 260,000 financial advisors 1,500 asset management firms 26 plan providers 237,000 plan sponsors 9.3 million individual investors 24 million plan participants

17 Morningstar s Business Model Advice Information Portfolio Management Model Portfolios Investment Strategies Analyst Access Research and Ratings Software and Analytics Data

18 Top Five Products 2013 Morningstar Data Morningstar Advisor Workstation Morningstar Direct Investment Advisory Services Morningstar.com 18.5% 13.3% 11.3% 8.5% 8.0% % of Consolidated Revenue

19 Countries 27

20 Industry Landscape

21 Generally Strong Equity Markets Total Returns % YTD April 30 Source: Morningstar U.S. Market Index

22 Estimated Net Flows ($bil) Equity Alternative & Commodity Allocation Taxable & Municipal Bond Source: Morningstar Direct

23 Estimated Net Flows ($bil) Open End Funds and ETFs Actively managed Passively managed Source: Morningstar Direct

24 Passive Management Continues Gaining Share % of Total Net Assets Open End Funds and ETFs Source: Morningstar Direct

25 Client Regulatory Pressures Increasing Dodd-Frank Solvency II UCITS IV Future of Financial Advice MiFID II Retail Distribution Review

26 Increasing Investor Engagement Aggregate data for finance/investment sites in 2013 Page views Unique users Average pages viewed per visit Average time spent per visit Source: ComScore MediaMetrix

27 2013 Highlights: Accomplishments

28 Morningstar Managed Portfolios +55.3% in 2013 Assets ($bil) $7.3 $4.7 $.94 $1.4 $1.8 $2.2 $1.6 $2.1 $2.7 $

29 Managed Retirement Accounts Number of Participants (000) Assets ($bil) $25.1 $13.7 $11.0 $8.6 $0.12 $0.23 $15.7 $ $27.8 $

30 Morningstar Direct Licenses +15.2% in ,348 2,229 2,961 3,524 4,773 6,134 7,388 8,

31 New ipad App

32 USA Research Innovation Quantitative Ratings Morningstar Fund Research Target-Date Series Research Paper 2013 Survey Page 3 of 69 Target-Date Target-Date Report Asset Flows Global Fund Investor Experience Quantitative Equity Report Release Date: 10 May 2013 Reporting Currency: USD Trading Currency: USD General Electric Co GE Last Close Quantitative Fair Value Estimate Market Cap (Bil) Sector Industry Country of Domicile p Industrials Diversified Industrials USA United States General Electric Co provides services ranging from aircraft engines, power generation, water processing & household appliances to medical imaging, business & consumer financing, media content & industrial products. Quantitative Scores Scores All Rel Sector Rel Country Quantitative Moat Wide Valuation Fairly Valued Quantitative Medium Uncertainty Financial Health Moderate GE p Undervalued Fairly Valued Overvalued Valuation Sector Country Current 5-Yr Avg Median Median Price/Quant Fair Value Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow Dividend Yield % Price/Book Price/Sales Profitability Sector Country Current 5-Yr Avg Median Median Return on Equity % Return on Assets % Revenue/Employee (K) Quantitative Moat Score 100 Financial Health Sector Country Current 5-Yr Avg Median Median Distance to Default Solvency Score Assets/Equity Long-Term Debt/Equity Growth Per Share 1-Year 3-Year 5-Year 10-Year Revenue % Operating Income % Earnings % Dividends % Book Value % Stock Total Return % Price Versus Quantitative Fair Value 2009Quantitative Equity 2012 Report 2013 Release 2014 Date: 10 May 2013 Reporting Currency: USD Trading Currency: USD Sales/Share Forecast Range 40 Forcasted Price Dividend 32 Split Contents Executive Summary Momentum: Neutral This slowing growth rate is in some ways inevitable, as a large percentage of retirement General Electric 24 Standard Deviation: Co GE 3 Target-Date Asset Flows As the target-date industry continues to mature, it is displaying both predictable and surprising Quantitative Fair Value Estimate 11 Process attributes. Predictably, its organic growth rate is slowing as target-date series have become 16 Total Return Wk comes from younger investors with lower balances and salaries. In addition, some portion of 20 Performance established fixtures in defined-contribution plans. Fees in the series continue to fall as assets flow in, Last Close Quantitative 8 Fair Value Estimate Market Cap (Bil) Sector Industry Country of Domicile Yr Portfolio and post-2008 returns have been strong, reflecting broad market trends. while those assets are still technically within target-date designs, they are not captured in 46 Price Total Return % / Market (Morningstar US Index) 51 People Surprisingly, some of the industry s debate over how to best manage target-date series asset Dividend Yield % Price/Earnings 57 Parent allocation may be overdone. assets A Morningstar voluntarily analysis reported of the to average its database industry May glide 2013.) path shows it will Price/Revenue General Electric Co provides services ranging from aircraft Price Versus Quantitative 66 Morningstar Analyst Ratings Fair Value meet most retirees spending needs, and funds with significantly different asset allocations have Undervalued Fairly Valued delivered similar returns in recent years. engines, power generation, water processing Overvalued & household 2009 Josh Charlson, 2010 Ph.D broad mutual fund asset 2013classes. Indeed, over 2014the past three years, target-date funds have Fund of Funds Strategist appliances to medical imaging, 467,885 business Monthly Volume &(Thousand consumer Shares) Other factors may contribute to these investments relative success over the long term. A new Sales/Share Liquidity: High josh.charlson@morningstar.com Morningstar study of data on the firms offering the target-date series suggests a tie between better financing, media content & industrial TTM Financials products. (Fiscal Year in Mil) Forecast Range stewardship practices and stronger risk-adjusted performance. 182, , , , , ,289 Revenue Laura Pavlenko Lutton % Change Director, Fund of Funds Research; Forcasted Price 19,141 10,344 14,208 20,098 17,406 17,598 Operating Income Editorial Committee Chair Exhibit % Change Here 1are some specific findings from Morningstar s annual study: Dividend 17,410 11,025 11,644 14,151 13,641 14,134 Net Income laura.lutton@morningstar.com 3Net Target-date Assets series and 50% assets crossed the $500 billion mark in 2013 s first quarter, marking strong 48,601 24,593 36,123 33,359 31,331 29,475 Operating Cash Flow Split -16,010 Quantitative -8,634-9,800 Scores -12,650-15,126-15,484 Capital Scores Spending Organic growth in Growth a maturing Rates, industry. David Falkof 32,591 15,959 26,323 20,709 16,205 13,991 Free Cash Flow U.S. Target-Date Mutual Fund Analyst % Sales All Rel Sector Rel Country Momentum: EPS 3 Mutual The industry s Funds, market leaders Vanguard, Fidelity, and T. Rowe Price maintain their hold on the % Change david.falkof@morningstar.com 3.23 Quantitative 1.50 Moat Wide Free Cash 100 Flow/Share industry. The three still control about three fourths of the industry s assets, despite impressive Dividends/Share Kailin Liu Data through 12/31/2012. Source: growth Morningstar, from Inc. some of the industry s smaller players Valuation Fairly Valued Book Value/Share Mutual Fund Analyst 10,663 10,615 10,573 10,406 10,340 10,340 Shares Outstanding (Mil) Quantitative Uncertainty Medium Profitability kailin.liu@morningstar.com Total Net Assets 3 Morningstar s Organic Growth Rate analysis of target-date glide paths showed most should deliver similar results that Return on Equity % Financial Health Moderate Return on 62 Assets % Kathryn Spica, CFA should sufficiently support retiree spending to age 85. Results begin to notably diverge beyond Net Margin % Mutual Fund Analyst that age, however, with glide paths with less exposure to stocks carrying increased risk that retirees Asset Turnover Financial Leverage kathryn.spica@morningstar.com will outlive their savings Gross Margin % GE Operating Margin % Janet Yang, CFA 330, , , , , ,299 Long-Term Debt Senior Mutual Fund Analyst 3 Glide paths that shift their asset allocation to retirement and those that continue to shift after 104, , , , ,026 p USA 123,714 Total Equity Fixed Asset Turns retirement are likely to produce similar outcomes for investors up to age 85, Morningstar found. janet.yang@morningstar.com 2013 Morningstar. All rights reserved. The information, data, analyses, and opinions contained herein (1) are proprietary to Morningstar, Inc. and its affiliates (collectively, Morningstar ), (2) may not be copied or redistributed, (3) Beyond do not constitute that 1.3 investment age, advice however, offered by Morningstar results 21.1 (4) are provided diverge. solely for informational purposes 9.4 and therefore are not an offer to buy or sell a security, and (5) are Total not warranted Return to be accurate, complete, % or timely. Morningstar shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use. Past performance is no guarantee of future results. Quarterly Revenue & EPS Revenue Growth Year On Year % Revenue (Bil) Undervalued Mar Jun Sep Dec Total Fairly Valued Overvalued Rising markets in 2012 and early 2013 helped target-date series turn in strong absolute returns, with equity-heavy 3.41 series faring 3.33 particularly well overall But glide paths that emphasize equities Dividend Yield % Earnings Per Share tend to produce more-volatile returns Price/Earnings Price/Revenue 2013 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call To license the research, call Page 1 of p Industrials Diversified Industrials United States Valuation Current 5-Yr Avg Sector Median ß Country Median Price/Quant Fair Value Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow Dividend Yield % Price/Book Price/Sales Profitability Current 5-Yr Avg Sector Median Country Median Return on Equity % Return on Assets % Revenue/Employee (K) Quantitative Moat Score 100 Target-date funds continued to collect retirement investors assets at an impressive clip in 2012, Morningstar Fund Research Target-Date Series Research Paper 2013 Survey Page 1 of 69 whether viewed on an absolute or relative basis. Target-date mutual funds took in $54.8 billion in net new flows last year, reaching a total of $484.8 billion. The first quarter of 2013 saw an additional $23 billion in new assets, and target-date assets as of March 31, 2013, stood at $508 billion. Target-Date Series Research Paper 2013 Survey On an organic growth basis, flows remained healthy, but as has been the case over the past several years, the growth rate for target-date funds is leveling off. As shown in Exhibit 1, growth rates have been declining steadily since 2007, immediately following the passing of the Pension Protection Act of 2006, though 2012 s 15% organic growth rate nearly matched 2011 s 16% rate. plans already have begun defaulting investors into target-date investments; much of the new growth the slowing growth may reflect companies switching to CIT or custom target-date structures, and Morningstar s mutual fund database. (Morningstar had more than $229 billion in CIT target-date Still, as noted in Exhibit 2, the industry s growth rate remains more than competitive with other grown faster than other core asset classes, surpassed only by commodities and alternatives, which Neutral Standard Deviation: / Market (Morningstar US Index) 2013 Morningstar. All rights reserved. The information, data, analyses, and opinions contained herein (1) are proprietary to Morningstar, Inc. and its affiliates (collectively, Morningstar ), (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be accurate, complete, or timely. Morningstar shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use. Past performance is no guarantee of future results. Monthly Volume (Thousand Shares) Liquidity: High TTM Financials (Fiscal Year in Mil) 182, , , , , ,289 Revenue % Change 19,141 10,344 14,208 20,098 17,406 17,598 Operating Income % Change 17,410 11,025 11,644 14,151 13,641 14,134 Net Income 48,601 24,593 36,123 33,359 31,331 29,475 Operating Cash Flow -16,010-8,634-9,800-12,650-15,126-15,484 Capital Spending 32,591 15,959 26,323 20,709 16,205 13,991 Free Cash Flow % Sales EPS % Change Free Cash Flow/Share Dividends/Share Book Value/Share 10,663 10,615 10,573 10,406 10,340 10,340 Shares Outstanding (Mil) 500 Bil USD Morningstar Fund Research 2013 Global Fund Investor Experience Report 15 May 2013 Page 1 of 172 Global Fund Investor Experience 2013 Report 2 Acknowledgments 3 Introduction 4 Overall Scores 6 Regulation & Taxation 10 Disclosure 13 Fees & Expenses 20 Sales & Media 22 Country Summaries 47 Country Details Benjamin N. Alpert, CFA, CAIA Research Analyst John Rekenthaler, CFA Director of Research Sana Suh Research Analyst Executive Summary The Global Fund Investor Experience report was designed to encourage a dialogue about global best practices for mutual funds from the perspective of fund shareholders. This biennial report measures the experiences of mutual fund investors in 24 countries in North America, Europe, Asia, and Africa. Morningstar researchers evaluated countries in four categories Regulation & Taxation, Disclosure, Fees & Expenses, and Sales & Media with greater weight given to factual, empirical answers as well as the high-priority issues of fees, taxes, and transparency. Key Take-Aways 3 Investors in the United States are treated the best, while South Africans face the most difficult fund investing environment. 3 Commission bans are spreading around the world. By mid-summer, Australia and the United Kingdom will have restricted commissions with more in the pipeline. This will prevent many conflicts of interest, but it is still to be seen if investors will fare better with fewer avenues to pay advisors. 3 Despite the comparable size of the UCITS market to the U.S. fund market, investors in Europe (and other countries where UCITS are sold) do not receive the economies of scale that benefit U.S. investors with lower fees. 3 The United States is one of only a handful of countries where fund investors are responsible for annual taxes on capital gains earned by funds. 3 Funds in most countries continue to treat the names of portfolio managers as trade secrets. Investors have no way to determine if the current manager is responsible for a fund's success or failure. 3 To coincide with UCITS IV implementation, we've expanded the importance and depth of our point-of-sale document evaluation. 3 Thailand falls from an A- overall to a B because of the length and comprehensiveness of its simplified prospectus. 3 South Africa falls below average in almost every area, failing Disclosure outright with an F. 3 Australia and New Zealand do not require funds to publicly disclose full portfolio holdings, leaving investors to guess at the source of fund returns. Additionally, France, Korea, South Africa, and the United Kingdom only disclose full holdings to current owners. This lack of transparency is disappointing Morningstar. All rights reserved. The information, data, analyses, and opinions contained herein (1) are proprietary to Morningstar, Inc. and its affiliates (collectively, Morningstar ), (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be accurate, complete, or timely. Morningstar shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses or opinions or their use. Past performance is no guarantee of future results.

33 Research Innovation

34 2013 Challenges

35 Next-Generation Software

36 Next-Generation Software Search for Funds, Stocks, etc Sort by Role Open-End Funds Exchange Traded Funds Closed-End Separate Accounts Variable Annuities Asset Flows Filings Funds United States (Local) Global Canada Europe Asia Australia/New Zealand Mid-East/Africa Latin America UK Developed Mkts Emerging Mkts Filings Equities Quotespeed Markets Funds Equities Credit Research Asset Allocation Analytics Attribution Portfolio Mstar Doc Lib Data Download API Center Excel Plug-in Charts Time Series Scatter Create List Column Set Tools Investment Lists Static Screens Column Sets My Files 24/7 Client Support Getting Started Training Support John Smith

37 New Organizational Structure Multiple points of contact for multiple capabilities All of our capabilities represented in one point of contact Client vs. Morningstar Text Client

38 New Organizational Structure Sales Solutions Products & Services Research Jim Tanner Business Dev. & Sales Kunal Kapoor Client Solutions Kunal Kapoor Information Products Tom Idzorek Investment Management Haywood Kelly Research Group

39 Investment Advisory Revenue 2013 vs AUA 2013 vs. 2012

40 Operating Expense Growth ($mil) $138.6 $128.3 $131.8 $128.9 Q Q Q Q4 2013

41 Clients Remain Cautious on Spending 2013 global spend on market data/analysis in 2013 Source: Burton-Taylor International Consulting LLC

42 2014 Update

43 ByAllAccounts Acquisition

44 Investing for the Future Morningstar Employees

45 Investing for the Future / Recent Hiring Activity* Data Manufacturing 45 Technology 36 Operations 20 Product Management 17 Research Analysts 11 *Graph shows net new hires by job function for six months ended March 31, 2014

46 Investing for the Future / Major Initiative Themes Search for Funds, Stocks, etc Sort by Role Open-End Funds Exchange Traded Funds Closed-End Separate Accounts Variable Annuities Asset Flows Filings Funds United States (Local) Global Canada Europe Asia Australia/New Zealand Mid-East/Africa Latin America UK Developed Mkts Emerging Mkts Filings Equities Quotespeed Markets Funds Equities Credit Research Asset Allocation Analytics Attribution Portfolio Mstar Doc Lib Data Download API Center Excel Plug-in Charts Time Series Scatter Create List Column Set Tools Investment Lists Static Screens Column Sets My Files 24/7 Client Support Support@morningstar.com Getting Started Training Support John Smith Re-platforming major software products

47 Investing for the Future / Major Initiative Themes Mobile

48 Investing for the Future / Major Initiative Themes 529s 403(b)s Annuities 401(k)s IRAs Advisor Asset Management Retirement Individual Investor Data aggregation/integration

49 Investing for the Future / Major Initiative Themes Data Collection Data Storage Calculations & Services Data Governance, Delivery & Support Dissemination Database and platform infrastructure

50 Investing for the Future / Major Initiative Themes Rules-Based (Passive) Strategic Beta Bet Against Market Portfolio (Active) Strategic beta

51 Investing for the Future / Major Initiative Themes Strategies: Investment Research Wide-Moat Deals Down Under By David Ellis Strong earnings and improving balance sheets make these Australian banks attractive. Financial-services firms have been a hard sell since they found themselves at the center of the 2008 downturn and embroiled in other messes, such as Europe s sovereign debt crisis. Slowly, though, the world s banks have been improving their balance sheets and getting control of troubled loans. Investors have noticed the progress. Shares of J.P. Morgan Chase JPM, Bank of America BAC, and Exhibit 11 Selected Target-Date Series Glide Paths labor markets stabilize, we expect the pickup in credit growth to strengthen. Data through 12/31/2012. Source: Morningstar, Inc. We prefer Australia and New Zealand Banking Group ASX:ANZ, National Australia Bank ASX:NAB, and Westpac Vanguard Banking Corp. ASX:WBC. These banks Fidelity are well managed, highly profitable, and T. Rowe diverse Price businesses, with strong competitive American advantages. Century Asset BlackRock LifePath Industry Average, All Asset Quality and Bad Debts Loan impairment costs are probably close to cyclical lows in Australia. However, asset quality continues to improve, and bad debt expenses could actually surprise in The low level of new impairments is one of the most pleasing parts to the major banks profit profile. Despite large home loan portfolios, the risk of higher bad debts resides almost entirely Equity Allocation % 100% Analyst research and other proprietary tools/content

52 Illuminating Investing Worldwide

53 2014 Initiatives Kunal Kapoor Head of Information Products and Client Solutions

54 Major Customer Groups Advisor Asset Management Retirement Individual Investor

55 Advisor: Key Initiatives Advisor Asset Management Retirement Individual Investor

56 Advisor: Key Initiatives Advisor Workflow Portfolio Accounting & Performance Reporting Billing Document Management Custodial & Trading Interface Rebalancing & Alerts Data Aggregation Investment Research Security Selection Back Office Middle Office Investment Research Client Relationship Management Financial Planning Proposal Generation Real-Time Market Monitoring Suitability & Compliance Asset Allocation Portfolio Construction Portfolio Analysis Investment Strategies Front Office Investment Management Integrate client data, products, third-party apps

57 Advisor: Key Initiatives Incorporate aggregation capabilities from ByAllAccounts

58 Advisor: Key Initiatives Monitor the markets 1 Check the pulse on the practice 2 Review clients 3 4 Review portfolios Access reports 5 Present reports 6 Launch ipad app for advisors

59 Asset Management: Key Initiatives Advisor Asset Management Retirement Individual Investor

60 Asset Management: Key Initiatives Search for Funds, Stocks, etc Sort by Role Open-End Funds Exchange Traded Funds Closed-End Separate Accounts Variable Annuities Asset Flows Filings Funds United States (Local) Global Canada Europe Asia Australia/New Zealand Mid-East/Africa Latin America UK Developed Mkts Emerging Mkts Filings Equities Quotespeed Markets Funds Equities Credit Research Asset Allocation Analytics Attribution Portfolio Mstar Doc Lib Data Download API Center Excel Plug-in Charts Time Series Scatter Create List Column Set Tools Investment Lists Static Screens Column Sets My Files 24/7 Client Support Getting Started Training Support John Smith Launch Direct 4.0 and map out user workflows

61 Asset Management: Key Initiatives Portfolio Analysis Screener Launch Direct 4.0 and map out user workflows

62 Asset Management: Key Initiatives Spotlight Being Smart About Strategic Beta By Alex Bryan Even if a strategy is theoretically sound, not all funds that purport to harness it are. Disenchanted with high fees and unreliable performance from professional security selectors, investors have increasingly adopted index funds over the years. But because most assets in the investing world are still actively managed, it is clear that many investors are not ready to settle for average researchers may also include a small-cap strategy in this group, the small-cap premium has diminished in recent decades and is unreliable at best. However, a small-cap tilt may still be useful when combined with another strategy. PowerShares S&P 500 High Quality SPHQ. The exchange-traded fund targets stocks in the S&P 500 Index with above-average growth and stability of earnings and dividends per share over the most recent trailing 10 years. It assigns its holdings one of three quality grades. Those with the highest grade receive the greatest Strategic Beta

63 Asset Management: Key Initiatives Expand regulatory thought leadership

64 Asset Management: Key Initiatives Analysts per region Expand equity and credit research business

65 Asset Management: Key Initiatives Five Pillars of Morningstar Manager Research People Parent Process Performance Price Fund results are hard to predict, but fund fees are not. Christopher Traulsen Fund Analyst since 1997 Morningstar wants investors to pay fair prices. Of all the factors that determine a fund s performance, its cost is the only one that s certain. That is why price is the most measurable of Morningstar s five pillars of fund analysis. Expense ratios shouldn t be an adviser s sole focus, but they are a strong predictor of fund performance, and poor fee structures can negate any benefits that active fund management can provide. Understanding price gives advisers a measure of control over their outcomes. Morningstar analysts dig into the fee structure of every fund they rate to identify which are significantly cheaper or more expensive than their peers. If performance fees are charged, we investigate whether these charges support the investment process or if they enrich the management team at investors expense. This research combines with four other pillars to form the comprehensive framework of the Morningstar Analyst Rating and Report. Advisers use this report see the true cost of investing and find funds that are truly suitable for a client s objectives. Hear more from our analysts and download a research report global.morningstar.com/ukprice Build awareness of manager research globally

66 Asset Management: Key Initiatives Five Pillars of Morningstar Manager Research People Parent Process Performance Price We like fund managers who never forget that their fund s money comes from investors. Jackie Beard Fund Analyst since 1999 Morningstar knows the people behind every fund we rate. In order to have conviction in a fund s future performance, you have to be confident in the fund management team running the money. That is why people is one of the five pillars of Morningstar s approach to fund analysis. It is at the core of a consistent process which leads to clear opinions on the funds we cover. Morningstar has one of the largest, most experienced fund analyst teams in the industry. Our analysts get to know the people behind the funds through regular face-to-face meetings. When managers move firms, our analysts deep knowledge of the managers and team members involved lends insight into how they might thrive (or struggle) within the new environment. This research into the people running a fund combines with four other pillars to form the comprehensive framework of the Morningstar Analyst Rating and Report. Advisers use this report to look at what s behind our analyst ratings and really understand why a fund may be more or less suitable for a client. Hear more from our analysts and download a research report global.morningstar.com/ukpeople Build awareness of manager research globally

67 Asset Management: Key Initiatives Five Pillars of Morningstar Manager Research People Parent Process Performance Price If you have a great fund offered by a bad fund house, the fund will ultimately suffer. Oliver Kettlewell Fund Analyst since 2008 Morningstar believes investors deserve funds with good parents. A fund can have the best managers and researchers but still falter if the firm offering the fund doesn t properly support it. That s why parent is one of the five pillars of Morningstar s approach to fund analysis. Good corporate parents know that successful funds can flourish when corporate interests are aligned with those of end investors. It is easy for investors to overlook neglectful parent firms if a fund is doing well, but good short-term performance can conceal deep structural problems. Morningstar s global team of fund analysts examine whether a firm s corporate culture is conducive to long-term success, and if succession plans are in place when managers move firms. This research into a fund s parent firm combines with four other pillars to form the comprehensive framework of the Morningstar Analyst Rating and Report. Advisers use this report to look at how a fund s parent firm may change whether a fund may be more or less suitable for a client. Hear more from our analysts and download a research report global.morningstar.com/ukparent Build awareness of manager research globally

68 Asset Management: Key Initiatives Five Pillars of Morningstar Manager Research People Parent Process Performance Price A fund s outperformance can be just as concerning as its underperformance. Muna Abu-Habsa Fund Analyst since 2006 Morningstar investigates the why behind performance. Short-term bursts of fund outperformance may look good, but numbers are ultimately meaningless if investors can t rely upon them. That s why performance is one of the five pillars of Morningstar s approach to fund analysis. We believe a fund s gains and losses should predict how market conditions will affect its returns in the future. Morningstar analysts examine a fund s performance through the lens of its investment process to provide clear, forward-looking guidance. They sift through the numbers to help investors understand whether a fund s past performance shows signs of a repeatable strategy, if market conditions belie the fund s true volatility, or if its size has hindered or helped long-term returns. Our research into a fund s performance combines with four other pillars to form the comprehensive framework of the Morningstar Analyst Rating and Report. Advisers use this report to look past the performance numbers to find a fund that s truly suitable to meet a client s objectives. Hear more from our analysts and download a research report global.morningstar.com/ukperformance Build awareness of manager research globally

69 Asset Management: Key Initiatives Five Pillars of Morningstar Manager Research People Parent Process Performance Price Fund managers should be able to justify every transaction in a portfolio. Karine Nowak Fund Analyst since 2011 Morningstar favours a clear process over fickle profits. If a fund s holdings don t match its strategy, then it s nearly impossible to have reasonable expectations for long-term performance. That s why process is one of the five pillars of Morningstar s approach to fund analysis. Investors deserve to know how a fund fits within a diversified investment portfolio. behind every fund covered. We want to know what managers are trying to accomplish, why they hold investments and how much risk is involved. Through this analysis we gain a clear understanding of whether a strategy is repeatable and how it might perform in a variety of market conditions. Morningstar Analyst Rating and Report. Advisers use this report to look at how a portfolio manager s process may make a fund suitable for a client. Hear more from our analysts and download a research report global.morningstar.com/ukprocess Through face-to-face meetings with fund management teams, Morningstar s global analyst team scrutinise the processes This research into a fund s investment process combines with four other pillars to form the comprehensive framework of the Build awareness of manager research globally

70 Asset Management: Key Initiatives Depth Proposed Morningstar Institutional Coverage Current Equity Database 4,000 Issuers 30,000 36,000 Deepen data set on top global equities

71 Retirement: Key Initiatives Advisor Asset Management Retirement Individual Investor

72 Individual Investor: Key Initiatives Advisor Asset Management Retirement Individual Investor

73 Individual Investor: Key Initiatives

74 Individual Investor: Key Initiatives Evaluate Investments 1 Discover new investments 2 Build / upgrade a portfolio 3 4 Monitor Investments Monitor the markets 5

75 Individual Investor: Key Initiatives

76 Individual Investor: Key Initiatives New Stock Overview Concept Apple Inc AAPL QQQ Strength Moat Moat Trend Narrow Stable Stewardship B Valuation Fair Value $ Good Is this stock cheap or expensive right now? Price Latest Price 0.85 $ Day Change % Valuation detail page Apple Inc AAPL QQQ Strength detail page Apple Inc AAPL QQQ Forward P/E 11.0 Price/ Book 3.7 Price/ Sales 2.9 Morningstar Analysis Price/ Cash Flow 9.4 Yield 2.27% Apple will have to fend off increased competition from Android-based competitors in the years ahead. We believe Apple s strength lies in its experience and expertise in integrating hardware, software, services, and third-party applications into differentiated devices that allow Apple to capture a premium on hardware sales. Although Apple has a sterling brand, robust product pipeline, and ample opportunity to gain share in... Company Profile Market Cap bil Open Price $ by Brian Colello, CPA Apple Inc designs, manufactures, and markets personal computers, mobile communication devices, media devices personal computers, and portable digital music players, and sells various related software, services, peripherals and networking solutions Week Range Key Stats 9: Day Today s Avg Range Volume Volume mil 11.5 mil... Stock Industry Avg. Price/Earnings TTM Is this stock cheap or expensive right now? Fairly Valued Our Fair Value Estimate for Apple is $570 per share. After a successful launch, follow-up sales of new devices in the March 2014 quarter were below our expectations. Apple has taken the strategy of maintaining premium pricing, which may support gross margins but also weigh on future revenue growth Fair Value $ Consider Buy Consider Sell $ or below $ or above Latest Price $ Fair Value Estimate For each company we cover, we forecast future sales growth, margins, and cash flows to calculate a present Fair Value Estimate (FVE) for the stock. Calculating FVEs is not an exact science, so we won t rate a stock as Undervalued or Overvalued until the market price falls below or rises above our fair value estimate by a specific amount, determined by our Valuation Uncertainty rating. Valuation Uncertainty This rating indicates our analysts level of certainty about the Fair Value Estimate and considers the following factors: The firm s Economic Moat rating, sales predictability, operating leverage, financial leverage, and exposure to contingent events, How strong is this company? Strong and Stable Three analyst-driven ratings determine the fundamental, sustainable strength of a business, in our view: > Economic Moat, or the strength of its long-term (20+ years) competitive advantages, if any > Moat Trend, which explains whether the competitive position is improving or deteriorating > Stewardship, which measures the quality of management Moat Narrow Moat Trend Stable Stewardship Good B Moat Sources Intangible Assets Switching Costs Network Effect Cost Advantage Efficient Scale Moat Rating None Narrow Wide Moat Trend Negative Stable Positive Stewardship... A B C D F Sector Technology Stock Type Cyclical Industry Consumer Electronics Employees 84,400 Stock Style Large Core Fiscal Year Ends Price/Book Price/Sales Revenue Growth (3yr avg) Net Income Growth (3yr avg) Operating Margin %TTM Day Change % 52-Week Range Latest Price $ $ Low Medium High Very High Extreame We believe Apple has a narrow economic moat based on modest, but not insurmountable, customer switching costs. Companies with narrow economic moats have strong competitive positions, but we don t expect their advantages to last as long as those of wide-moat companies. Apple s Moat Trend is Stable. The moat trend rating describes how a company s competitive position is changing over time, and can be either positive, indicating the competitive position is strengthening; negative, indicating the competitive position is weakening; or stable. We view Apple as a good steward of shareholder capital. The firm maintains sterling brand recognition and has hundreds of millions of loyal followers, but it has made a couple of missteps under CEO Tim Cook that, some would argue, would have never happened under Steve Jobs. Financials Income Statement Revenue Operating Income Net Income Earnings Per Share Shares Outstanding Balance Sheet Current Assets 2013/09 170,910 48,999 37, , /09 156,508 55,241 41, , /09 108,249 33,790 25, , /12 57,594 17,463 13, , /12 54,512 17,210 13, ,348 Net Margin %TTM ROA TTM ROE TTM Debt/Equity Dividends Declared Date 01/27/2014 Ex-Dividend Date 02/06/ Price To Earnings TTM Apple TTM Industry TTM S&P TTM Key Measures AA Morningstar Gross Return Operating Corporate Margin % on Credit Rating Invested Capital % AAA / AA / A / BBB / BB / B / CCC / CC / C / D Trailing 12 month Trailing 12 month Trailing 12 month Debt vs Equity... Apple vs Industry Avg.... Apple vs Industry Avg.... Apple vs Industry Avg USD Mil Year to Date Margin %

77 2014 Initiatives Tom Idzorek President, Morningstar Investment Management

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87 Financial Highlights Stéphane Biehler Chief Financial Officer

88 2013 Highlights First-Quarter 2014 Capital Allocation

89 2013 Highlights

90 2013 Key Metrics ($mil) Revenue Operating Income Free Cash Flow* 6.1% 13.3% 32.0% $658.3 $698.3 $150.7 $170.7 $116.0 $153.1 *Free Cash Flow is considered a non-gaap financial measure under SEC regulations.

91 Morningstar Revenue 5-YR Compound Annual Growth Rate 6.8%

92 Morningstar Revenue 10-YR Compound Annual Growth Rate 17.5%

93 Top Five Products 2013 Revenue ($000) % Change Morningstar Data $ 129, % Morningstar Advisor Workstation $ 93, % Morningstar Direct $ 79, % Investment Advisory $ 59,187 (10.8%) Morningstar.com $ 55, %

94 Revenue by Region

95 Operating Margin 26.0% 21.8% 21.9% 22.9% 24.4%

96 First-Quarter 2014

97 First Quarter 2014 Key Metrics ($mil) Revenue Operating Income Free Cash Flow* 7.3% 5.0% NMF $168.9 $181.2 $40.6 $38.5 $17.6 ($8.9) *Free Cash Flow is considered a non-gaap financial measure under SEC regulations.

98 First-Quarter 2014 Balance Sheet ($mil) March December Cash, cash equivalents, and investments $iiii264.0 $iiii298.6 Working capital $iiii177.1 $iiii177.3 Total assets $i1,007.4 $i1,030.7 Deferred revenue $iiii159.6 $iiii149.2 Long-term liabilities $iiiiii62.8 $iiiiii69.8 Total equity $iiii696.7 $iiii691.3

99

100 Free Cash Flow* and Acquisitions Acquisition spending as a % of FCF ($mil) FCF Acq. % $88.9 $108.6 $141.7 $116.0 $153.1 $74.2 $102.3 $ $ $ % 94.2% N/A N/A 7.2% *Free Cash Flow is considered a non-gaap financial measure under SEC regulations.

101 Potential Uses of Cash Balance sheet strength organic expansion acquisitions stock buyback dividend

102 Dividends and Share Repurchases ($mil) $277.3 $170.9 $50.7 $29.3 Share repurchases Dividends paid 11 $40.7 $ Q1 14 $251.8 $153.5 $21.7 $25.5 $17.4 $7.6

103 Share Repurchases Period Total amount purchased Average price per share * Through Dec. 31, 2013 $w449.8 mil $w63.64 Year to date through April 30, 2014 $gw21.7 mil $w76.85

104 Shares Outstanding (mil) 0.4% 7.1% 3.4% 0.5% Q

105 Reconciliation of Non-GAAP Measure with the Nearest Comparable GAAP Measure ($mil) March March Cash provided by operating activities $w186.7 $i146.0 $ii11.9 $i26.7 Less: capital expenditures ($gw33.6) ($iii30.0) i($i20.8) ($ii9.1) Free cash flow* $w153.1 $i116.0 ($iii8.9) $i17.6 *Free Cash Flow is considered a non-gaap financial measure under SEC regulations.

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